oversight

Mineral Revenues: Shortcomings in Onshore Federal Oil and Gas Production Verification

Published by the Government Accountability Office on 1990-06-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               United   States   General   Accounting   Office
                               Report to the Chairman, Subcommittee
GAO                            on Mineral Resources Development and
                               Production, Committee on Energy and
                               Natural Resources, U.S. Senate

‘June 1990
                               MINERAL
                               REVENUES
                               Shortcomings in
                               Onshore Federal Oil
                               and Gas Production
                               Verification




                   RESTRICTED---Not       to be released outside the
                   General Accountlug Of&e mletw speci3lcalIy
                   approved b-y the Offlee of Congressional
                   IkbtiOnS.
                                                           REtEMD                2
                                        5488&                                    $
                                                                                  k’
                                                                                 :ih-
: GAO/RCED-90-99                                                                 i:
Resources, Community, and
Economic Development Division

B-238152

June 26,199O

The Honorable Jeff Bingaman
Chairman, Subcommittee on Mineral Resources
  Development and Production
Committee on Energy and Natural Resources
United States Senate

Dear Mr. Chairman:

This report responds to your request that we evaluate the Department of the Interior’s
inspection and enforcement program responsibility for onshore federal and Indian oil and gas
lease production verification. The Secretary of the Interior has assigned that responsibility
to the Bureau of Land Management. Specifically, this report shows that the extent of the
Bureau’s production verification is inadequate to enable Interior to accurately determine oil
and gas royalties.

As agreed with your office, unless you publicly announce its contents earlier, we plan no
further distribution of this report until 30 days from the date of this letter. At that time we
will send copies to the Secretary of the Interior and other interested parties and make copies
available to others upon request.

This review was performed under the direction of James Duffus III, Director, Natural
Resources Management Issues, who can be reached at (202) 275-7756. Major contributors are
listed in appendix VIII.

Sincerely yours,     ,




            I
J. Dexter Peach
Assistant Comptroller General

Enclosure
                             reported by companies. Because BLM does not ensure accurate reporting
                             of production, the industry is still essentially operating on an honor
                             system.

                             BLM relies on its checklist inspections to meet the FOGRMA requirement
                             that leases producing significant quantities of oil and gas, as well as
                             those with histories of noncompliance, be inspected at least annually.
                             These checklist inspections, however, do not verify production. Very
                             few production verification inspections are performed. BLM cannot
                             ensure that this combination of inspections is an effective strategy for
                             verifying production in order to satisfy FDGRMA'S requirement that Inte-
                             rior accurately determine royalties.

                             Furthermore, decentralization of responsibility, coupled with inade-
                             quate guidance and oversight, have resulted in significant differences in
                             how BLM'S field offices have implemented the inspection and enforce-
                             ment program. In addition, BLM'S official data for the inspection and
                             enforcement program are unreliable, contributing to BLM'S inability to
                             effectively oversee implementation of the program.



Principal Findings

Most Oil and Gas             Although production verification is a key to meeting NXRMA'S require-
Production Is Not Verified   ment that Interior establish a system to accurately determine oil and gas
                             royalties, BLM'S inspection program verifies production on only a small
                             number of leases. Since 1986, BLM has conducted production verification
                             inspections on less than 3 percent of the 15,000 federal and Indian
                             leases in the 9 states included in GAO'S review. Instead, BLM relies on its
                             checklist inspections to surface potential production underreporting. As
                             a result, the extent of BLM'S production verification is inadequate to sat-
                             isfy FIXiRMA's requirement that Interior be able to accurately determine
                             royalties.


Program Oversight Is         In January 1987, BLM decentralized responsibility for its inspection pro-
Inadequate                   gram to its state and field offices with little guidance, and it has not
                             conducted any agencywide evaluations of the program. Left essentially
                             on their own, field offices have varied widely in organization and
                             staffing of the program, the degree of supervisory oversight provided
                             inspectors, the number of inspections planned and conducted, the types


                             page3                                     GAO/RCEDW99 Production Verification
Page 6
                         contents




Chapter 6                                                                                          55
Agency Comments and ;:‘;;~$;~;;+;;;tion                                                            55
                                                                                                   56
Actions Taken or      Automated Program Data                                                       56
Planned in Response Cooperation Between BLM and MMS                                                56
to Our Concerns About
BLM’s Inspection and
Enforcement Program
Appendixes                Appendix I: Objectives, Scope, and Methodology                           58
                          Appendix II: Basic Checklist Inspection Record                           63
                          Appendix III: Analysis of Citations Issued by Six BLM                    65
                              Field Offices
                          Appendix IV: Producing Oil and Gas Lease Inspections,                     68
                              Citations, Assessments, and Civil Penalties in Fiscal
                              Year 1986
                          Appendix V: Producing Oil and Gas Lease Inspections,                      69
                              Citations, Assessments, and Civil Penalties in Fiscal
                              Year 1987
                          Appendix VI: Producing Oil and Gas Lease Inspections,                     70
                              Citations, Assessments, and Civil Penalties in Fiscal
                              Year 1988
                          Appendix VII: Comments From the Department of the                         71
                              Interior
                          Appendix VIII: Major Contributors to This Report                          93

Tables                    Table 2.1: Production Verification Inspections Completed                  23
                          Table 3.1: Average Number of Leases, Wells, and                           33
                              Completed Inspections Per Full-Time Equivalent
                              Inspector in Fiscal Year 1988
                          Table 4.1: Leases and Priorities in Fiscal Year 1988                      41
                          Table 4.2: Reported Inspections of High-Priority Leases in                42
                              Fiscal Year 1988
                          Table 4.3: Reported Inspections of Low-Priority Leases in                 43
                              Fiscal Year 1988
                          Table 4.4: Recorded and “Empty” Inspections in Fiscal                     44
                              Year 1988
                          Table 4.5: Accuracy of AIRS Data for Selected Fiscal Year                 45
                               1988 Inspections



                          Page 7                                   GAO/RCED9@99Production Verification
Page 9   GAO/‘RCEB9O-99Production Vetication
                       chapter1
                       htroduction




                       The Congress responded to these problems by passing the Federal Oil
Federal Laws Require   and Gas Royalty Management Act of 1982 (FOGRMA). FDGRMA requires
Inspection and         that Interior establish a comprehensive system, which includes inspec-
Enforcement            tions, for accurately determining oil and gas royalties. FOGRMA further
                       directed Interior to establish procedures to ensure that authorized
                       inspectors at least annually inspect each lease site that either (1) pro-
                       duces or is expected to produce significant quantities of oil or gas in any
                       year or (2) has a history of noncompliance with applicable laws or regu-
                       lations. FM;RMA does not provide details about the type of inspections to
                       be conducted. However, as part of the comprehensive system, such
                       inspections must provide information relevant to the accurate determi-
                       nation of oil and gas royalties. A key component of a comprehensive
                        system for accurately determining oil and gas royalties is the verifica-
                       tion of production. The Secretary of the Interior assigned responsibility
                        for verifying production to BLM. BLM assigned responsibility for produc-
                        tion verification to its inspection and enforcement program.

                       IQGRMA also authorized Interior to impose civil and criminal penalties
                       against operators who fail to comply with government requirements.
                       Finally, NXRMA directed Interior to establish and maintain adequate
                       training programs for its inspectors in the inspection and accounting
                       methods and techniques to be used to implement FOGRMA.


                       BLM has implemented lQGRMA and other laws concerning onshore oil and
BLM’s Inspection and   gas operations through regulations intended to promote the orderly and
Enforcement Program    efficient exploration, development, and production of oil and gas. These
                       regulations are further implemented and supplemented by BLM'S
                       Onshore Oil and Gas Orders, which specify minimum standards of per-
                       formance for oil and gas operators. BLh4 plans to issue nine orders, and
                       had issued five as of April 1990.

                       BLM’S headquarters     consists of program offices that issue policy gui-
                       dance for their respective programs. BLM field operations are comprised
                       of state offices, district offices, and resource area offices. BLM has 12
                       state offices, each managed by a state director. State offices are respon-
                       sible for providing statewide program direction, oversight, and coordi-
                       nation of resource programs for federal lands under BLM’S jurisdiction.
                       Each state office has several district offices, each managed by a district
                       manager. Each district office is responsible for two or more resource
                       areas. District offices provide oversight and support to their resource
                       area offices.



                        Page 11
                                                               Chapter 1
                                                               Introduction




Figure 1.1: Oil Production Facility

      WELL   AND   FLOW   UNES.   SEPARATIOW   AND   STORAOE       l   SALT   WATER   0,SPOSAL




                                                               Sources Based on Prtmer of 011and Gas ProductIon, Dallas, Texas American Petroleum Institute, 1976




                                                               Page 13                                                 GAO/RCRD-9049Production Vdfication
                             Chapter 1
                             Introduction




                             where operations could constitute a serious risk to public health and
                             safety if a major undesirable event occurred; (3) require an inspection to
                             comply with laws, regulations, or agreements, such as those with tribal
                             organizations; or (4) have at least one major violation, or at least five
                             other violations, relating to the environment or to public health and
                             safety in a period greater than 24 months.

                             Field offices generally assign inspection priorities at the start of each
                             fiscal year and prepare inspection plans summarizing the numbers and
                             types of inspections planned for that year. They are expected to com-
                             plete 100 percent of their high-priority inspections, but they are allowed
                             to determine the frequency of inspections for the remaining leases. How-
                             ever, the strategy states that BLM'S goal is to inspect all producing leases
                             at least once every 3 years and to inspect new leases within the first
                             year of production start-up. In addition to these inspections, inspectors
                             perform other production-related inspections, such as witnessing or
                             independently performing oil measurement prior to a sale, or witnessing
                             the calibration of gas meters (which measure gas production).


Conducting Inspections       BLM'S current strategy describes three levels of production inspections:

                         . Level 1: a basic checklist inspection that is intended to identify whether
                           there may be any problems with how production is being handled, mea-
                           sured, and reported.
                         . Level 2: a follow-up inspection performed in response to problems iden-
                           tifiedy   a level 1 inspection or some other source.
                         l Level 3: a detailed production verification inspection for instances in
                           which there is reason to suspect significant loss because oil or gas pro-
                           duction was mishandled.

                             BLM regards basic checklist inspections as screening inspections because
                             they identify problems that indicate the need for a follow-up inspection
                             or a production verification inspection. Inspectors use a 40-point check-
                             list to conduct basic checklist inspections (see app. II), which generally
                             take an hour or less to complete on one-well leases. BLM'S inspection
                             strategy goals are based on using level 1 checklist inspections. Level 2
                             follow-up inspections consist of any steps that may be taken to resolve a
                             problem, but they are not widely used. Rather, problems noted in a basic
                             checklist inspection are generally resolved during that inspection or
                             result in a level 3 production verification inspection.




                              Page 16                                   GAO/RCEIMO-99Production Veriiication
                                        Chapter 1
                                        Introduction




                                    .   resolve or forward to MMS for action any differences between the
                                        inspector’s calculations and the operator’s reported volumes.

                                        Figure 1.4 shows a BLM inspector gauging the oil in a storage tank on a
                                        federal lease during a production verification.

Figure 1.4: Inspector Gauging Oil
Storage Tank




                                                             -.
Enforcement Actions                     Inspectors have a series of enforcement actions they can take when an
                                        operator is not in compliance with federal requirements. If the violation
                                        is minor and obviously inadvertent, the inspector may initially issue an
                                        oral warning to the operator. If an operator needs clarification of a fed-
                                        eral standard, or if a site-specific requirement is necessary, the inspector
                                        may issue a written order to the operator. If the operator violates a reg-
                                        ulation, the inspector may issue a Notice of Incidents of Noncompliance,
                                        which is a citation requiring that the violation be corrected. These cita-
                                        tions may be related to surface management requirements, production,
                                        safety, or other administrative requirements, such as failure to comply
                                        with an inspector’s order. To determine an operator’s compliance his-
                                        tory when assigning inspection priorities, BLM counts the number and
                                        types of citations issued to the operator during the previous 24 months,

                                         If the operator does not correct a cited violation within the time allowed,
                                         BLM may issue an assessment for the violation. Major violations may
                                         result in daily assessments, limited to $500 per day per violation, up to a
                                         maximum of $1,000 per day per operator per lease. Minor violations



                                         Page 17                                   GAO/RCED-90.99Production Veritication
                        chapter1
                        introduction




                        When AIRSwas implemented in September 1986, it replaced a previous
                        automated system. In August 1988, BLM designated AIRSas the official
                        record of inspection and enforcement accomplishments. AIRSis used to
                        record the results of inspections, information related to lease identifica-
                        tion, the status of individual wells and production and storage facilities
                        on leases, inspection priorities, citations, and BLM approvals of specific
                        operations, such as disposal of waste water. Field offices that perform
                        inspection and enforcement are responsible for ensuring the accuracy of
                        their own AIRSdata. BLM's Denver Service Center maintains the AIRS
                        system and provides support to AIRSusers in state and field offices.


                        MMS is responsible for accounting for and collecting revenues from fed-
MMS Royalty             era1 and Indian leases. To help ensure accurate royalty payments, MMS
Accounting              uses several processes, including audits and automated reviews of data.
Responsibilities        Although BLM has historically received onshore production reports from
                        operators, transfer of this function to MMS was completed in 1989. MMS
                        now receives production reports from onshore operators and subse-
                        quently provides information to BLM, although BLM retains the inspection
                        and enforcement responsibility for all onshore leases.

                        BLM and MMS coordinate their efforts under a Memorandum of Under-
                        standing initially signed in January 1984. If inspectors identify
                        problems during an inspection that could affect reported royalties, they
                        are to notify MMS so an audit of reported sales may be initiated. Simi-
                        larly, if MMS personnel identify problems during an audit of an operator,
                        they may ask BLM to inspect that operator’s leases and verify produc-
                        tion. In December 1988, the agencies updated the Memorandum and
                        addressed specific coordination needs relating to the transfer of onshore
                        production reporting.


                        Concerned about possible significant problems in the management of
Objectives, Scope,and   BLM'S inspection and enforcement program, the Chairman, Subcommittee
Methodology             on Mineral Resources Development and Production, Senate Committee
                        on Energy and Natural Resources, asked GAO in May 1988 to evaluate
                        the program and determine whether FQGRMA requirements are being ful-
                        filled. In subsequent discussions with the Chairman’s office, we agreed
                        to present program data and to evaluate (1) the adequacy of production
                        inspections, (2) BLM'S program oversight, (3) the accuracy of BLM'S offi-
                        cial program data, and (4) cooperation between BLM and MMS, including



                         Page19                                    GAO/‘RCELMCW9
                                                                               Production Verlflcatlon
chapter 1
introduction




more reliable, we presented data from the summaries in our appendices.
We did not verify the accuracy of those data.

The Department of the Interior provided written comments on a draft of
this report. Those comments are presented and evaluated in appendix
VII, and comments regarding actions that Interior has taken or planned
are summarized in chapter 6.




Page 21                                 GAO/lKXLM@W Pmductlon Verlflcatlon
                                     Chapter2
                                     Limited Production Verification DoesNot
                                     Ensure Accurate Computation of Royalties




                                     Under BLM’S strategy, production verification inspections are conducted
Few Inspections                      if problems identified in checklist inspections are not resolved or if there
Verify Production                    is reason to suspect significant loss because of mishandling of oil or gas
                                     production. Few production verification inspections are conducted
                                     because most problems found during basic checklist inspections are
                                     resolved during those inspections. However, the Montana state office
                                     program coordinator told us that he strongly encourages field office
                                     staff to do production verification inspections on leases with problems
                                     identified during checklist inspections, as well as random inspections on
                                     leases selected for other reasons.

                                     According to AIRS, BLM field offices under the Montana, New Mexico, and
                                     Wyoming state offices have conducted 68 production verification
                                     inspections since fiscal year 1986, which represents less than 1 percent
                                     of the approximately 15,000 leases managed by these state offices. BLM
                                     state and field office representatives from Montana and New Mexico,
                                     however, believe that AIRSfigures are inaccurate, and they rely more on
                                     figures presented in quarterly reports prepared by the field offices.
                                     According to state office summaries of these quarterly reports, 460 pro-
                                     duction verification inspections have been conducted since fiscal year
                                     1986, which, if each inspection was for a different lease, covers less
                                     than 3 percent of the leases. Data on production verification inspections
                                     are presented in table 2.1.

Table 2.1: Production Verification
Inspections Completed                                           FY 1988         FY 1987          FY 1988
                                                                        Qdy.            Otly.            Qtly.                        Total
                                     State office            AIRS     report AIRS     report AIRS      report                      leases’
                                     Montana                    0         30    7          63   13          72                       1,700
                                     New Mexico                   1            84       0            56        0     .-   17         9,812
                                     Wyoming                      2            76      30            62       15.-             b     3,920
                                     Total                        3          190       37          181       28           89        15,432
                                     aData from July 1988 AIRS data base

                                     bThe Wyoming State Office did not reqwe quarterly reports I” fiscal year 1988



                                     BLM’S inspection strategy has been modified several times, and the role
BLM Has Not                          of production verification inspections has changed over time. In its
Validated Its                        fiscal year 1986 inspection strategy, BLM encouraged field offices to con-
Inspection Strategy                  duct production verification inspections on 15 percent of their high-pri-
                                     ority leases. In its May 1987 strategy, however, BLM no longer
                                     encouraged these inspections. Program officials believed they were not



                                     Page 23                                                  GAO/RCRD-90-99Production Verification
                  Chapter 2
                  Limited Production Verification DoesNot
                  Ensure Accurate Computation of Royalties




                  However, the results of this test could be interpreted to show that pro-
                  duction verification inspections are indeed cost-effective, because addi-
                  tional revenues collected were almost 6 times the total cost of all 109
                  inspections. Nevertheless, because BLM cannot show that the test was
                  adequately designed, it is impossible to reach conclusions on the basis of
                  this test. For example, BLM cannot document how the inspected leases
                  were selected or that they were representative of high-priority leases.

                  Furthermore, BLM has not adequately assessed whether its current
                  inspection strategy is effective in meeting the FOGRMA requirement that
                  Interior be able to accurately determine oil and gas royalties-that    is,
                  whether the “shoe fits the foot.” A BLM official also told us that the
                  strategy has not been evaluated by external experts, such as other agen-
                  cies or groups that have inspection responsibilities. As a result, BLM does
                  not know if the program is effective.

                  Currently, two BLM district offices are conducting a pilot project in
                  which the criteria for assigning a high priority under FOGRMA'S produc-
                  tion standard have been increased to a monthly average of 18,000 bar-
                  rels of Oil (from 3,000 barrels) or 70 Mmcf of gas (from 30 Mmcf). If BLM
                  adopts these criteria, fewer leases would rank as high priority, which
                  would give inspectors more flexibility to select other leases to inspect
                  and to determine what types of inspections to perform. The pilot project
                  will run until 1991

                                           --
                  Because BLM'S basic checklist inspections provide information related to
Conclusions       production, they satisfy KGRMA’S requirement for annual inspections of
                  leases with high production or histories of noncompliance. However,
                  they do not verify production. In fact, BLM does little to verify produc-
                  tion. We believe that the extent of BLM’S production verification is inade-
                  quate for satisfying the EWRMA requirement that Interior be able to
                  accurately determine oil and gas royalties.


                  Because BLM does not ensure accurate reporting of production, we rec-
Recommendations   ommend that the Secretary of the Interior require the Director of BLM to
                  determine whether, using available resources, alternative inspection
                  strategies would better identify significant underreporting of produc-
                  tion. Such a determination should explore using production verification
                  inspections on randomly selected leases. If Interior determines that such
                  probability sampling would be more efficient than inspecting all high-



                  Page 26                                    GAO/RCEWKH9 Production Veriiication
Inspection Program Oversight Is Inadequate


                          BLM'S oversight of its inspection and enforcement program is inadequate.
                          Since BLM decentralized program responsibility to state offices in Jan-
                          uary 1987, no BLM headquarters manager has had direct responsibility
                          for   the program. State office program coordinators have responsibility
                          for   program oversight; however, they do not have line authority over
                          the   program. As a result, field offices differ in their implementation of
                          the    inspection and enforcement program.

                           In addition, little program evaluation has been done. Since decentraliza-
                           tion, no BLM headquarters evaluations have been done. Further, not all
                           state office coordinators have formally evaluated their programs, and
                           the types of evaluations that have been done differ. Without thorough
                           monitoring or evaluation of field offices, BLM cannot ensure compliance
                           with its inspection program strategy.


                           Following BLM’S general management philosophy of decentralization, a
Program                    1986 BLM task force recommended that responsibility for monitoring and
Responsibility Is          evaluating the inspection and enforcement program be delegated from
Decentralized              BLM headquarters to state offices. As a result, the headquarters inspec-
                           tion and enforcement office was disbanded in January 1987, and respon-
                           sibility for coordination and oversight was officially transferred to state
                           offices in May 1988. State offices exercise this responsibility through
                           program coordinators, who hold staff positions and do not have direct
                           line authority.


Decentralization of        Decentralization of the inspection and enforcement program resulted
Program Recommended by     from recommendations of a 1986 BLM task force. The task force
                           examined the program to determine whether it (1) met its objectives, (2)
BLM Task Force             made the most efficient use of the agency’s resources, (3) applied appro-
                           priate regulatory effort to ensure compliance with the law, and (4) met
                           the administration’s policy objectives. The November 1986 task force
                           report recommended several actions to strengthen the program by
                           making it conform to BLM'S decentralized organization and by making
                           more efficient use of BLM'S resources, including the following:

                         . Merge the program with other fluid minerals program activities and
                           emphasize state office responsibility for managing program activities in
                           the field by changing the headquarters role from detailed field office
                           coordination and oversight to policy coordination and guidance.




                           page27                                      GAO/RCED.W99 Production Verlficdion
                              Chapter 3
                              Inspection Progmm Oversight Is Inadequate




                              The study was to assess state office implementation of BLM’s 1986 task
                              force recommendations and the May 1988 BLM memorandum. It found
                              that state and field offices generally perceive that the program “has
                              essentially faded away in Washington,...and do not perceive either a
                              strong core of technical expertise nor strong management support for
                              the program that they feel is needed.” The study reported that this per-
                              ception was caused by unfilled vacancies, which prevented the fluid
                              minerals division from fulfilling its obligations to the inspection and
                              enforcement program, and that BLM headquarters needs to assume its
                              proper and expected role in policy, guidance, and general program over-
                              sight. BLM management agreed with the report’s findings.


State and Field Office        The three state offices that we reviewed have inspection and enforce-
Oversight of the Inspection   ment program coordinators who are responsible for providing policy
                              guidance to and evaluating field office programs. State office program
and Enforcement Program       coordinators hold staff positions, advising the state directors. They do
                              not have direct line authority over field office personnel. Coordinators
                              in the three state offices told us that they receive copies of field offices’
                              annual inspection plans, which they review but do not formally
                              approve.

                              The six field offices we visited (one district office and five resource area
                              offices) varied in the amount of program oversight received. Four
                              resource area offices in New Mexico and Wyoming received additional
                              oversight from district office program coordinators, who are generally
                              responsible for providing guidance and assistance, but who are in staff
                              positions without direct authority to supervise inspectors. The Montana
                              resource area office did not have a district office coordinator to assist it,
                              so it and the Montana district office received oversight from the state
                              office coordinator.


                              The inspection and enforcement program has been implemented incon-
Program Is                    sistently by the six field offices we reviewed. We found variances in
Implemented                   supervisory controls, staff levels, use of production verification inspec-
Inconsistently                tions, enforcement actions, and the certification program.



Supervisory Controls Vary     Responsibilities of and expectations for supervisors varied among field
                              offices, as did the types of supervisory activities. Because much of the




                              Page 29                                     GAO/RCED90-99Pmduction Veritkation
Chapter3
Inspection Program Oversight Is Inadequate




undocumented supervision. As a result, field offices have little evidence
of the extent to which inspectors are supervised. Without appropriate
supervision, field offices may not be able to ensure that inspectors are
doing their jobs correctly.

Field office supervisors told us that they often supervised inspectors
informally through day-to-day contacts, rather than through more
formal means. For example, not all supervisors regularly accompanied
inspectors on inspections or reviewed documented inspection results or
enforcement actions. Some supervisors noted that they had confidence
in the inspectors’ abilities because most inspectors have years of experi-
ence and are certified. Inspectors in the six field offices we visited aver-
aged 5 years of experience as inspectors plus another 6 years of prior oil
and gas experience, and all but two were certified.

Because none of the field supervisors regularly accompanied inspectors
on field inspections to review their performance, they could not ensure
the consistency of inspections, or the consistency or appropriateness of
enforcement actions. For example, the Rio Puerto supervisor said that
he had accompanied the only inspector perhaps twice a year, while the
Farmington East supervisor said his field visits ranged from four times
a year to a couple of times per month, depending on the inspector’s
grade level and experience. Supervisors who told us that they made
occasional field visits did not document those visits.

Not all supervisors reviewed checklist inspection records. For example,
the Farmington West supervisor said he reviewed handwritten inspec-
tion records completed by inspectors and initialled them before giving
them to the data entry clerk for input into AIRS. The Farmington East
supervisor said he reviewed all inspection records but did not document
his review. Supervisors in Buffalo and Kemmerer said they spot-checked
inspection records, and we noted that inspection records in Buffalo were
initialled. Supervisors in the other three offices said they did not gener-
ally review inspection records,

Similarly, not all supervisors said they reviewed documented enforce-
ment actions. For example, the Farmington East supervisor said he
reviewed enforcement actions and initialled them. In contrast, the Great
Falls supervisor said that he did not review any enforcement actions
taken by the inspectors because he believed that the inspectors knew
what actions were proper and that they have never received complaints
from lease operators.



Page 31                                      GAO/RCED-9093Production Verification
                                           chapter 3
                                           Inspection Pro@amOversight Is Inadequate




Table 3.1: Average Number of Leases,
Wells, and Completed Inspections Per                                                                                            Average
Full-Time Equivalent Inspector in Fiscal   Field office                                  Inspectors             Leases         Wells    Inspections
Year 1988                                  Farmington
                                             Farmington East                                         6”              295       1,700             105
                                             FarmIngton West                                         6b              295       1,175              15
                                                                                                    12               295       1,440              60
                                           Buffalo                                                3 75c              230       1,025             150
                                           Great Falls                                            2.65d              280       1,400             170
                                           Kemmerer                                                  2b               90         250              80
                                           Miles City                                              3 1e              135         810             120
                                           Rio Puerto                                                 lb             170         405              76
                                           Total/Average                                          24.5               240       1,150              95
                                           aExcludes a superwor who does not do InspectIons and one full-time inspector who was in training tn
                                           fiscal year 1988 and therefore did not complete any Inspections Independently
                                           “Excludes   supervisor who does not do InspectIons; all inspectors are full-time.

                                           ‘Includes a superwary Inspectr-jr who estimated that he spent 75 percent of his time domg mspectlons
                                           and three full-time mspectors

                                           dlncludes a superwsory Inspector who estimated that he spent 75 percent of his time domg inspectlons,
                                           one full-time w.pector, and one mspector who estimated that he spent 90 percent of his time doing
                                           lnspectlons in fiscal year 1988

                                           ‘Includes a superwory mspectur who estimated he spent 10 percent of his time domg lnspectlons and
                                           three full-time Inspectors




Use of Production                          Not all field offices conduct production verification inspections or con-
Verification Inspections                   duct them in the same manner. The two Montana field offices and the
                                           Kemmerer, Wyoming, office reported conducting production verification
Varies                                     inspections in fiscal year 1988 in response to problems identified during
                                           checklist inspections or on randomly selected leases. However, the other
                                           three field offices did not report conducting any production verification
                                           inspections in fiscal year 1988 and did not plan to conduct any in fiscal
                                           year 1989. Inspectors who conducted production verification inspec-
                                           tions spent varying amounts of time at each lease site during its month
                                           of inspection. Great Falls inspectors estimated they spent 3 full days; a
                                           Miles City inspector estimated 6 to 8 full days; and Kemmerer inspectors
                                           estimated 2 to 3 hours on each of 6 days. BLM’s current strategy does not
                                           indicate how much time should be spent at a lease site during a produc-
                                           tion verification inspection,


Enforcement Actions Vary                   Field offices varied in their use of oral warnings and written orders,
                                           authorized by BLM for certain circumstances, such as inadvertent minor



                                           Page 33                                                         GAO/RCED-90-99Production Verification
                           Chapter 3
                           Inspection Program Oversight Is Inadequate




                           the 6 field offices-19      inspectors and 6 supervisors-were     hired prior
                           to December 1986.

                           National certification program guidance states that inspectors must
                           clearly demonstrate proficiency by actually performing the 61 tasks
                           listed in the technical review, even inspectors hired before the program
                           was announced, and that simulating these skills is not acceptable. Field
                           offices generally did not follow this requirement. Instead, reviewers
                           varied the technical review according to their interpretation of what
                           was necessary and each inspector’s knowledge and experience. For
                           example, only two inspectors said that all tasks were covered in their
                           technical reviews. Others said that they had general discussions with
                           their reviewers but did not address or demonstrate each task, and others
                           said that they were not asked to undergo the technical review because
                           they were experienced inspectors.

                           National certification program guidance also states that certification
                           covers both production and drilling operations, and that the technical
                           review must cover both. However, the Miles City, Montana, and Farm-
                           ington West, New Mexico, supervisors said that they expect new inspec-
                           tors to conduct only checklist inspections, so technical review tasks
                           related to other types of inspections, such as drilling inspections, are not
                           expected of those inspectors.


                           As of July 1989, BIN had not centrally evaluated the inspection and
Program Evaluation Is      enforcement program since January 1987, when the headquarters
Inadequate                 inspection and enforcement office was disbanded. State offices are
                           expected to formally review and evaluate their field offices. However,
                           these reviews differ among state offices, and not all offices have con-
                           ducted such reviews. In addition, problems that have been reported in
                           other Interior reviews of the inspection and enforcement program have
                           not been addressed or corrected.


Centralized Program        Prior to 1987, the headquarters inspection and enforcement office con-
Evaluations Discontinued   ducted quality assistance reviews of field offices. These reviews were
                           intended to ensure that field offices were (1) implementing BLM oil and
                           gas program directives and the program strategy; (2) issuing written
                           citations when violations were detected and initiating uniform enforce-
                           ment actions when violations were not corrected in a timely manner; (3)
                           documenting inspection results and enforcement actions; and (4) pro-
                           viding training, equipment, and data entry and clerical support to


                           Page 36                                       GAO/RCELWO-33Production Veriftcation
                             effectiveness of state office evaluation efforts varied widely, and that
                             there was no uniformity in their evaluation processes. The study noted
                             that the Montana and New Mexico state offices appeared to have fully
                             implemented the requirement to evaluate their field offices, but that
                             other state offices have not implemented the requirement. Because BLM
                             headquarters has not issued formal guidelines describing the necessary
                             components for effective state office reviews, the study concluded that
                             BLM could not evaluate the adequacy of any state office review process.



BLM’s Response to Interior   In response to FOGRMA requirements, Interior’s Office of the Inspector
Program Evaluations Has      General conducted two biennial audits of Interior’s royalty management
                             activities that included BLM’S inspection and enforcement program. Its
Been Inadequate              most recent report, for fiscal years 1988 and 1989, found that BLM’S cur-
                             rent inspection strategy does not ensure proper production reporting
                             because most inspections do not verify reported production. In response,
                             BLM said that it would evaluate the need to change the strategy. The
                             prior biennial review, for fiscal years 1986 and 1987, reported that BLM
                             did not adequately support the inspection and enforcement program,
                             and, as a result, BLM could not ensure accountability for oil and gas pro-
                             duced and sold from federal and Indian lands.

                             The Inspector General’s office also reviewed BLhf’S inspection and
                             enforcement program for fiscal years 1984 and 1985. The review identi-
                             fied six major problem areas: inadequate management support for the
                             program; lack of accountability for oil and gas produced and sold; lack
                             of oil transporter inspections; inconsistent interpretation, enforcement,
                             and implementation of program regulations; failure to use cooperative
                             agreements with Indian tribes and states; and inadequate training for
                             inspectors. Its June 1986 report made 17 recommendations to correct
                             these problems. A 1989 followup review found that although BLM
                             reported implementing 15 of the 17 recommendations, only 8 had actu-
                             ally been implemented. Two recommendations not implemented
                             addressed the need for inspectors to verify reported oil and gas
                             production.

                             The Federal Managers’ Financial Integrity Act of 1982 (31 USC. 3512
                             (b) and (c)) requires agency heads to prepare annual reports on the
                             status of their internal control and accounting systems. In Interior’s
                             fiscal year 1986 and 1987 reports, BLM’s inspection and enforcement
                             program was identified as a control weakness. Both reports found that
                             the program does not ensure uniform interpretation, enforcement, and



                             page37
    Chapter3
    Inspection Program Oversight Is Inadequate




s Develop standard guidelines for state offices’ program reviews and con-
  duct such reviews annually;
l Establish minimum standards for supervisory responsibilities, expecta-
  tions, review, and documentation; and
l Evaluate current program staffing levels and develop staffing
  standards.




    Page 39                                      GAO/RCED90-99Production Verification
                                             chapter4
                                             Automated Official Program Data
                                             Are Unreliable




                                             percent). Of the 474 high-priority leases, 355 (75 percent) were ranked
                                             high under the production criterion only, 81 (17 percent) were ranked
                                             high under the compliance criterion only, and 38 (8 percent) were
                                             ranked high under both criteria.

Table 4.1: Leases and Priorities in Fiscal
Year 1988                                                                          Hig,lv&rity       Lo;-pp;;ity         Other
                                                                                                                        leasesa            Total
                                             Field office                             No.     Pet.     No.     Pet.     No. Pet.         leases
                                             Farmington
                                               Farmington East                        188        13 1,206          84    35       3        1,429
                                               Farmington West                        108         5 2,052          94    24       1        2,184
                                                                             ~~ -__I_ 296         8 -__3,258       90    59       2        3,613
                                             Buffalo                .~     -~~         92        11      724       82    63       7          879
                                             Great Falls                      ~-____ 20           3      684       95    19       2          723
                                             Kemmerer                                  34        16      139       64    43      20          216
                                             Giles city                                18         4      291       74    86      22          395
                                             RIO Puerto                                14         9      148       90     2       1          164
                                             Total                                    474         8 5,244          80   272       4        5,990
                                             aMay include newly prodwng leases that have not yet been ranked and abandoned leases that are no
                                             longer ranked as prodwng leases Field offtces reported completing 30 lnspectlons on these leases in
                                             fiscal year 1988
                                             Source. AIRS, Feb 1989


                                             We found that, on the basis of AIRS production and compliance data, 151
                                             of the 474 leases that were assigned a high priority for inspection
                                             should have had a low priority. We similarly identified another 58 leases
                                             that were assigned a low priority when they should have had a high
                                             priority.

                                             Inspectors or data entry clerks manually enter production and citation
                                             information and the assigned priority into AIRS Field office representa-
                                             tives told us that production and citation data in AIRS may not be accu-
                                             rate, and that they may use other information when assigning inspection
                                             priorities. For example, the Farmington West supervisor stated that
                                             inspectors sometimes forget to enter production data into AIRS, but he
                                             believed that assigned priorities are correct, even if not supported by
                                             the production data in AIRS.The Buffalo supervisor stated that his
                                             inspectors may use combined oil and gas production when assigning
                                             high priorities, which is allowed under the program strategy, but not
                                             recorded in that manner in AIRS.The Rio Puerto inspector said he judges
                                             an operator’s past cooperation when deciding whether to assign a high
                                             priority on the basis of compliance history. He noted that he usually



                                             Page 41                                                  GAO/RCED-9089Production Verification
                                          Chapter 4
                                          Automati Of’fkid Pm@un Data
                                          Are Unreliable




Reported Inspections of Low-              In fiscal year 1988, BLM established a goal of conducting basic checklist
priority   Leases                         inspections on low-priority leases once every 3 years, which should
                                          result in about one-third of these leases being inspected annually.
                                          According to AIRS,five of the six field offices met this goal, as shown in
                                          table 4.3. However, Farmington West did not meet the goal because
                                          inspectors were assigned to other inspection and enforcement program
                                          activities, according to the supervisor.

Table 4.3: Reported Inspections of Low-
Priority Leases in Fiscal Year 1988       Field office                             Leases      Inspections       Percent
                                          Farmington
                                            Farmington East                          1,206              440            36
                                            Farmington West                          2,052               10             0=
                                                                                     3,258              450            14
                                          Buffalo                                      724              427            59
                                          Great Falls                                  684              409            60
                                          Kemmerer                                     139              115            83
                                          Miles City                                   291              284            98
                                          Rio Puerto                                   148               56            38
                                          Total                                      5.244            1.741            33
                                          aLess than 1 percent
                                          Source: AIRS, Feb. 1989.

                                          According to AIRS production and citation data, 51 of the 1,741 low-pri-
                                          ority leases reported as inspected and 7 of the 3,503 low-priority leases
                                          reported as not inspected were incorrectly assigned low priority.

Reported Inspections Not Done             Inspections recorded in AIRS have not always been done. AIRS uses the
                                          closing date from inspection records to identify when inspections were
                                          done. However, we found that four field offices closed inspection
                                          records even though the inspections were not conducted. As a result, the
                                          number of completed inspections in AIRSis overstated. As table 4.4
                                          shows, we identified 72 of these “empty” checklist inspections for fiscal
                                          year 1988. Of these 72 “empty” inspections, 26 were for high-priority
                                          leases in Farmington West, and the remaining 46 were for low-priority
                                          or unranked leases in the 4 offices.




                                           Page 43                                   GAO/ECDm93     PmductIon VerIftcatIon
                                        chapter 4
                                        Automated Official Program Data
                                        Are Unreliable




Inaccurately Reported                   We randomly selected 300 leases from AIRS (50 from each field office).
                                        Of these, 199 were recorded as inspected in fiscal year 1988.’ For these
Inspection Results                      fiscal year 1988 records, we compared the data in AIRSwith the 40-point
                                        inspection checklists completed by inspectors and found many discrep-
                                        ancies. As shown in table 4.5, we found that inspection results for all 40
                                        points were accurately entered into AIRSfor 110 of the 199 inspections
                                        (55 percent). Errors were made in 71 of the 199 inspection records (36
                                        percent). Rio Puerto had the highest error rate-88 percent. The Rio
                                        Puerto inspector stated that when he put inspection results into AIRS, he
                                        often relied on his memory of inspections rather than writing his obser-
                                        vations on inspection records. For the remaining 18 cases (9 percent), we
                                        were unable to determine whether AIRS data were accurate because we
                                        could not locate source documents at the field offices.

Table 4.5: Accuracy of AIRS Data for
Selected Fiscal Year 1988 Inspections                                         Verified                        Unable to
                                                                             accurate        Erroneous         verify           Total
                                        Field office                         No. Pet.         No. Pet.        No. Pet.         No. Pet.
                                        Farmington
                                          FarmIngton East                      10      77        3      23       0       0       13       100
                                          Farmington West                       0       0        0       0       1     100        1       100
                                                                               10      72        3      21       1       7       14       100
                                        Buffalo                                20      57        3       9      12      34       35       100
                                        Great Falls                            30      64       17      36       0       0       47       100
                                        Kemmerer                               12      80        3      20       0       0       15       100
                                        Miles City                             37      95        2       5       0       0       39       100
                                        Rio
                                        ____Puerto                              1       2       43      88       5      IO       49       100
                                        Total                                 110      55       71      38      18        9    199        100


                                        None of the six field offices had adequate procedures to verify the accu-
                                        racy of data put into AIRS. Generally, data entry clerks, who enter AIRS
                                        data at all offices except Rio Puerto, told us that they visually scanned
                                        their entries to ensure their accuracy, but their work was generally not
                                        verified by someone else.


                                        AIRS does not contain a complete record of enforcement actions. AIRS
Enforcement Data Are                    should record data on BLM'S enforcement actions, such as citations
Incomplete                              issued for noncompliance, financial assessments, and civil and criminal
                                        penalties. However, AIRS data on these actions are incomplete. Further,

                                         ‘Of the remaining 101leases,we were able to confirm from field office files that 96 were not
                                         inspectedm fiscal year 1988.WPcould not locatefield office files for the remainingfive leases.



                                         Page 46                                                GAO/RCED9@99Production Verification
                        chapter4
                        AutomatedOffIcialProgramDatn
                        Are Unreliable




                        Although responsibility for data quality rests with field offices, system
Inadequate AIRS         maintenance and support is provided by BLM'S Denver Service Center.
Guidance and Controls   I naccuracies in automated data have occurred in part because there is
                        little central guidance on certain AIRSprocedures. As a result, field
                        offices develop their own procedures. Further, AIRSdoes not have key
                        internal controls, such as edits to identify data inconsistencies and mea-
                        sures to prevent erroneous data from entering AIRS.


Guidance                The Service Center has issued some guidance to field offices. However,
                        guidance has not been issued on certain AIRS procedures, which has
                        made AIRS data unreliable.

                        Service Center guidance has included an instruction manual, summaries
                        of program changes, an AIRS newsletter, and an informal telephone hot-
                        line. The manual provides instructions for entering data into AIRS and
                        lists authorized codes. The Service Center has modified AIRS several
                        times and with each change has provided implementation instructions
                        and summaries. The newsletter provides miscellaneous AIRS information
                        to field offices, and the telephone hot line is used for specific questions
                        or problems identified by users. Service Center representatives told us
                        that the issued guidance allows field offices the flexibility to use the
                        system differently to meet local requirements or needs, and field office
                        representatives agreed that this flexibility is desirable.

                        However, guidance has not been issued for critical AIRS procedures, such
                        as opening inspection records, closing or deleting inspection records, or
                        verifying data entry. Without such guidance, BLM cannot make mean-
                        ingful use of AIRS to manage the inspection and enforcement program.


Controls                AIRS does not have key internal controls, such as measures to prevent
                        erroneous data entry by field offices and edits to ensure that AIRSdata
                        are accurate. Data entered by different field offices may be inconsistent
                        and therefore not useful for accumulation or comparison. For example,
                        most offices record gas production in thousand cubic feet (Mcf), but Buf-
                        falo uses million cubic feet (Mmcf), which causes Buffalo’s production
                        data to be understated when compared with other offices’ data.

                        Further, AIRS does not have edits to ensure that the dates for opening
                        and closing inspections are valid or that the closing date comes after the
                        opening date. Nor does AIRS require that inspection results be recorded



                        Page47                                     GAO/RCEB9O.99Production Verification
                      Chapter4
                      Automated Off&l   Pmgmm Data
                      AR Unreliable




                      We recommend that the Secretary of the Interior require the Director of
Recommendations       BLM t0

                  l develop and issue guidance providing minimum AIRS requirements and
                    procedures, including procedures to open and close inspection records
                    and to verify the accuracy of data entered into AIRS;
                  . monitor field office compliance with the minimum requirements and
                    procedures to ensure consistent implementation;
                  l reconsider adding edits to AIRSto further ensure the accuracy of AIRS
                    data; and
                  - make all enforcement actions involving federal or Indian leases a part of
                    compliance histories recorded in AIRS.




                      Page 49                                  GAO/‘RCED9@99Production Verii%ation
                  Chapter6
                  More Cooperation Between BLM and
                  MMS Needed




                  The February 1987 revision provided that BLM would request MMS to per-
                  form audits when BLM inspections indicate that such audits may be
                  needed, and that MMS would begin such audits within 20 working days of
                  receiving requests and would report to BLM within 180 days. If MMS was
                  unable to meet this reporting deadline for reasons beyond its control, it
                  would furnish BLM a status report within 45 days that would specify the
                  time needed to complete the audit. In addition, MMS would request that
                  BLM conduct an inspection or review lease records when needed to
                  resolve accounting exceptions or to follow up on audit findings. BLM was
                  to begin these inspections within 10 or 20 working days (depending
                  upon the potential seriousness of problems) and report to MMS within 90
                  or 180 days (again, depending upon the potential problems).

                  The December 1988 revision eliminated these time frames. According to
                  the chief of MMs' Royalty Compliance Division, this was done to allow
                  MMS to shift its priorities and resources to conducting comprehensive
                  company audits under its April 1988 audit strategy, rather than
                  auditing individual leases requested by BLM. Under this revision, BLM
                  continues to notify MM.?of potential royalty irregularities identified
                  during inspections so that audits may be initiated. He noted that MMS
                  accumulates these requests and uses the information to help determine
                  audit emphasis or identify specific leases to examine. MMS may also con-
                  tinue to request BLM to inspect leases to resolve reporting exceptions or
                  audit findings. The December 1988 revision also contained procedures
                  for BLM and MMS to follow when receiving, correcting, and distributing
                  data from production reports.


Timeliness        According to several BLM state and field office representatives, the
                  results of their requests for audits are often not received in a timely
                  manner. MMS' untimely responsiveness to BLM requests for data was also
                  the primary complaint cited by BLM's Program Evaluation Division’s
                  1989 preliminary study. MMS officials did not agree that timeliness is a
                  valid concern because they said that BLM'S program activities do not
                  depend on MMS data.


Law Enforcement   BLM law enforcement agents in Montana and New Mexico told us that
                  MMS' cooperation with their criminal investigations of underreported
                  production has been a problem because MMS does not notify BLM of erro-
                  neous reports filed by operators, which could indicate criminal actions,
                  and because MMS has not provided them with other information



                  Page 61                                  GAO/RCED#W9 F’mduction Verification
                   Chapter 6
                   More Cooperation Between BLM and
                   MMS Needed




                   Transferring inspection and enforcement staff to MMS could incur sub-
                   stantial costs because MMS does not have a field office structure compa-
                   rable to BLMk. BLM'S inspection and enforcement program consists of
                   over 100 inspectors (plus supervisory and support staff) located in 33
                   field offices under 9 state offices. Locating the staff in BLM's field
                   offices, rather than in a central location, minimizes travel requirements
                   to and from inspections. If MMS relocated BLM program personnel to its
                   Denver center of operations, substantial relocation costs would be
                   incurred, as well as substantial costs for the inspectors to travel into the
                   field. On the other hand, if MMS created a field office structure for the
                   inspection and enforcement program, substantial start-up costs could be
                   incurred, as well as annual program costs. Finally, if BLM staff are trans-
                   ferred to MMS but left in place at BLhf'S field offices, MMS could have the
                   same type of difficulties ensuring consistent and effective program
                   implementation that BLM has had.


Strengths of MMS   The production verification component of the inspection and enforce-
                   ment program is perhaps more closely aligned with MMS' mission-roy-
                   alty accounting and collection-than   with BLM's tradition of surface
                   management. Accordingly, moving the program to MMS could enhance
                   cooperation between royalty collection and production inspection. The
                   more centralized management of MMS could also encourage more consis-
                   tent program implementation in the field.

                   In addition, MMS auditors are familiar with some of the production docu-
                   ments that BLM inspectors use to verify production. According to the
                   chief of MMS' Royalty Compliance Division, when MMS conducts a com-
                   prehensive audit of an oil and gas company, auditors usually compare
                   the company’s reported production volume for selected leases with
                   source documents, such as the buyer’s statement of volume received, to
                   evaluate the accuracy of the company’s reported production. However,
                   such audits do not include on-site inspections that may reveal physical
                   causes of underreported production, nor do they include independent
                   measurement of production, which BLM compares with production docu-
                   ments as part of production verification inspections.


                   BLM and MMS have improved their cooperation between the inspection
Conclusions        and enforcement program and the royalty management program by
                   addressing problems that we identified 10 years ago. Although some BLht




                   Page 63                                    GAO/RCJZD-90-99
                                                                            Production Verifkation
Chapter 6

Agency Commentsand Actions Taken or
Planned in Responseto Our ConcernsAbout
BLM’s Inspection and Enforcement Program
                   In its formal comments on a draft of this report (see app. VII), Interior
                   agreed, in general, with all of the report’s recommendations. In addition,
                   Interior noted that BLM has already recognized a number of the program
                   deficiencies identified in the report and taken or planned several actions
                   to address our concerns. We have not verified these actions, nor have we
                   evaluated their effect on the program. However, we believe that if these
                   actions are effectively implemented, they will significantly improve
                   BLM’S inspection and enforcement program.


                   Interior agreed that checklist inspections are not sufficient for effective
Production         production verification and deterrence of misreporting. Interior also
Verification       agreed that BLM needs to do more than what is required under the cur-
                   rent inspection strategy to adequately verify production. As a result,
                   Interior said that BLM is considering revisions to its inspection strategy
                   and associated procedures.

                   Interior noted that verifying all production would require witnessing
                   every sale and verifying recorded information. Interior further said that
                   although such full production verification inspections are too costly to
                   use as the sole inspection tool for all leases, BLM is considering revisions
                   to its current program strategy to use such inspections routinely and
                   more frequently.

                   Interior noted that a BLM task force recently reviewed the inspection and
                   enforcement program strategy and program resource needs. According
                   to Interior, the task force developed revised procedures to ensure ade-
                   quate inspection coverage, recommended intensive inspections on a sam-
                   pling of leases, recommended that all producing Indian leases be
                   inspected annually, and estimated resource needs to accomplish such
                   revisions to the strategy. Interior also identified the following actions to
                   ensure production accountability that BLM has taken or planned:

               . Minimum standards for oil and gas measurement and site security were
                 issued.
               l A peer review of the inspection strategy is planned.
               l A proposal to increase the role of oil and gas operators in production
                 verification is being developed.
               l The feasibility of contracting out inspections is being evaluated.
               l Stricter penalties for noncompliance are being considered.




                   Page 66                                    GAO/RCED-9099Production Verifkation
Chapter 6
Agency Comments and Actions Taken or
Planned in Responseto Our Concerns About
BLM's Inspection and Enforcement PrqWim




Interior also said that appropriate BLM and MMS staff will receive cross-
training in agency procedures, which should improve timeliness of data
access, and that an interagency meeting has been scheduled to discuss
better coordination of law enforcement matters.




Page 67                                    GAO/RcED-9099 Production Vwiflcation
                                            Appendix I
                                            Objective% Scope,and Methodology




Table 1.1: Federal and Indian Onshore Oil
and Gas Production and Royalties,                                    _    Oil production                                     Royalties
Calendar Year 1988                                                       Million                  Gas production         Million
                                            State office                 barrels     Percent      MmcP     Percent       dollars     Percent
                                            New Mexicob                        27         17        504          50         $159           34
                                            Wvomina”
                                              .      -                         69         45        324          32          174           37
                                            Montana”                           14          9         23           3           29            6
                                            Subtotal                          110         71        851          85          362           77
                                            Other states                       46         29        154          15          109           23
                                            Total                             156        100       1,005        100         $471          100
                                            aMilllon cubic feet

                                            %cludes    Kansas, New Mexico, Oklahoma, and Texas

                                            %cludes    Nebraska and Wyoming

                                            %cludes Montana, North Dakota, and South Dakota
                                            Source: MIneral Revenues The 1988 Report on Receipts from Federal and Indian Leases, published by
                                            MMS


                                            As shown in table 1.2, these three state offices also accounted for 79
                                            percent of the onshore leases and wells administered nationwide by BLM.

Table 1.2: Federal and Indian Onshore Oil
and Gas Leases and Wells, as of July                                                   Leases                                  WSIIS
1980                                        State off ice                           Number   Percent                    Number         Percent
                                            New Mexicoa                                9,812               50             37,049            45
                                            Wyomingb                                   3,920               20             20,344            25
                                            MontanaC                                   1,700                9              7,457             9
                                            Subtotal                                  15,432               79             64,850            79
                                            Other states                               4,245               21             17,245            21
                                            Total                                     19.677           100                82.095           100

                                            %cludes    Kansas, New Mexico. Oklahoma, and Texas.
                                            blncludes Nebraska and Wyoming

                                            ‘Includes Montana, North Dakota and South Dakota
                                            Source, AIRS.


                                            In each of the three states reviewed, we selected the two field offices
                                            (district or resource area offices) responsible for inspecting (1) the
                                            largest number of leases and (2) the smallest number of leases, as
                                            reported in BLM’S AIRS. Table I.3 lists the field offices we selected for
                                            review.




                                             Page 69                                                 GAO/RCEDgO96 Production Verification
                                        Appendix I
                                        Objectives, Scope,and Methodology




                                        To present program data, we obtained BLM'S official data from AIRS. We
                                        also obtained field office quarterly report summaries prepared manually
                                        by state offices, but we did not verify the accuracy of these data. We
                                        obtained the inspection data as of February 1989, to allow time for field
                                        offices to enter 1988 data. To evaluate the accuracy of AIRS data and the
                                        adequacy of BLM’S internal controls over the data, we interviewed the
                                        AIRS user representative at the Denver Service Center and program staff,
                                        including data entry personnel, at the field offices we visited, and we
                                        conducted various tests of the AIRS data. We also randomly sampled 50
                                        leases in AIRS for each of the 6 field offices we visited (300 leases alto-
                                        gether) and compared AIRS data with information shown in field office
                                        source files. As shown in table 1.4, 199 of these leases were inspected in
                                        fiscal year 1988,96 were not inspected in fiscal year 1988, and we could
                                        not locate the field office files for 5 leases.

Table 1.4: Leases Reviewed at Six ELM
Field Offices                                                                                           Not
                                                                       inspect;;;;         inspe$:;;;         File not
                                        Field office                                                            found    Total leases
                                        Farmington
                                          Farmington East              ~-__           13                 11          1             25
                                        - Farmington West                              1                 24          0             25
                                                                                      14                 35          1             50
                                        Buffalo        __.~~                          35                 14          1             50
                                        Great Falls                                   47                  0          3             50
                                        Kemmerer                                      15                 35          0             50
                                        Miles City                                    39                 11          0             50
                                        Rio Puerto                                    49                  1          0             50
                                        Total                                        199                 95          5            300


                                        To evaluate the record of cooperation between BLM and MMS, including
                                        whether one agency is better able than the other to fulfill production
                                        verification responsibilities, we interviewed BLM state and field office
                                        staff regarding their contacts with MMS. We also interviewed MMS royalty
                                        management personnel (in the Royalty Compliance and Production
                                        Accounting Divisions) regarding their interaction with BLM inspection
                                        and enforcement staff. We also reviewed the Memorandum of Under-
                                        standing between ELMand MMS.

                                        Our work was conducted from May 1988 through July 1989. Our review
                                        was performed in accordance with generally accepted government
                                        auditing standards. However, although we used program data in AIRS



                                        Page 61                                                GAO/RCED-90-99Production VerIficntion
Basic Checklist Inspection Record




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                                                 WlaDl
                      zo. tu l1tml1t~o1   tt tuu
                                              IslIQlIll
                                              nillH/tutln
                                               otm (omfluln       llmlul~
                     31.    Iulltl/tllnlo    I otla Lmom
                     -14.   ou llun0      01 Lwl. on uul. 64 ootl
                     -IS.   on Lnlltlmmm           lnlcm
                     JI.    lmol or Ilwlunt        *mt
                                                  mlltt tlm
                                                  m1ut1ol
                                            mm llwan   II III II mull1                  _
                     :a.  ImOl Of ll&sllloI ltmm
                     -!I. unol ot UIstmmt tIt1ttmmt
                     -1%cu IUHIWQwmt utu?asalt
                     -Il. ul LlCfll llmll 10 ll csscmr
                     -11. ~lwiti awctt~ na aim suwmmt




                Page 63                                                                     GAO/RCEB9O49 Production Verification
Appendix III

Analysis of Citations Issuedby Six BLM
Field Offices

                                            Table III.1 shows the numbers of citations issued in fiscal years 1986,
                                            1987, and 1988 by the six BLM field offices we visited. Table III.2 shows
                                            that more than half of these citations related to production, such as
                                            valves not being sealed properly.

Table 111.1:Citations Issued at Six BLM
Field Offices in Fiscal Years 1988, 1987,   Field office                           FY 1986            FY 1987             FY 1988
and 1988                                    Farmlnaton
                                               FarmIngton East
                                            ~.__                                       134                  156               195
                                               FarmIngton West                          73                  106               176
                                                                                       207                  262               371
                                            Buffalo
                                            -__                                        102                  260               204
                                            Great Falls                                 30                  116                75
                                                                                         4                    7                21
                                            Miles C~tv-                                127                  152               345
                                            RIO Puerto                                    1                   3                 1
                                            Total                                      471                  800             1.017
                                            Source. AIRS

Table 111.2:General Nature of Violations
Cited                                                               FY 1986                  FY 1987               FY 1988
                                            Reason
                                            __-    for issuance     No.     Pet.             No.     Pet.          No.     Pet.
                                            Production              236      5’              449      56           598         59
                                            Surface                 231~~    49              330      41           406         40
                                            Safety                    1       0”               5       1             0          0
                                            AdmInistratIve            0       0 __-           10       1             4          0a
                                            Unldentifled codes        1       0” .__-__        6       1             9          1
                                            Total                   471     100           800        100          1.017       100
                                            “Less than 1 percent
                                            Source AIRS

                                            Table III.3 shows all possible specific violations and the total number of
                                            each violation for the six field offices we visited. The total numbers
                                            represent all data in .4IRS through fiscal year 1988.




                                            Page 66                                    GAO/RCED-9@99Production VerlAcation
                                                 Appendix Ill
                                                 Analysis of citations   bBU‘?d   by Sk BLM
                                                 Field Off&a




Reason for citation iesuancea                                                                                                 Numb               PaKent
Administrative reauirements
41. Sales and movement of oil and condensate are not documented accordmg to minimum standards                                          0                      0
42. Operator has not established a site securrty plan in accordance with minrmum standards                                             0                      0
43. Operator does not maintain a seal record                                                                                           0                      0
44. Operator does not have a self-inspection program                                                                                   0                      0
50. Failed to comply with a notice, written order, or instruction of the authorized officer                                           11                     .2
52. Prepared, maintained or submrtted false, inaccurate or misleading reports, notices, affidavits, records,
   data, or other written information                                                                                                   3                    .l
53. Failure to obtam approval for specific operatrons                                                                                  0                     0
Citations coded to unidentified codes                                                                                                194               3.6
Total                                                                                                                             6.410              100.0
                                                 %ems numbered 1 through 40 represent citatrons resulting from the 4Il-point basic inspection checklist
                                                 shown in app. II Items numbered 41 through 53 are not directly related to the checklist.
                                                 ‘Includes 1,017 citations Issued rn FY 1966;600 citatrons issued in FY 1967;471 citations issued rn FY
                                                 1966;347 citations issued prior to FY 1966; and 2,775 undated citations; for a total of 5,410 citations.
                                                 ‘Less than 1 percent
                                                 Source, AIRS




                                                  Page 67                                                    GAO/-US             Raduction    VarliScatton
fioducing Oil and Gas LeaseInspections,
Citations, Assessments,and Civil Penaltiesin
Fiscal Year 1987
                                                                                                               Quarterly,
                                                                                                  AIRS’         reports -

                Montana State Office
                Production veriffcation inspections                                                     7              63
                Inspections other than PVW _~-~                                                      906            1,824
                Total inspections                                                                    915           1,887
                Citatronsd                                                                         1,114             632
                Assessments and civil oenaltres
                   Amount                                                                            $26          $2,750
                   Number Issued                                                                       2                    e

                New Mexico State Office
                Production verificatfon inspectfons                                                    0               56
                Inspections other than PVls                                                        2.751           5.54%
                Total inspections                                                                  2,751           5,604
                Citations                                                                          5,514            3,312
                Assessments and civil penaltfes-__
                   Amount                                                                               0        $30,250
                   Number issued                                                                        0                   e

                Wyoming State Office
                Productton verification insoectrons                                                    30              62
                Inspections other than PVls                                                        1,433           2,444
                Total insDections                                                                  1.463           2.506
                                                                                                                    .~
                Citatfons                                                                           1,528           1,142
                Assessments and CIVIIpenaltres
                   Amount                                                                         $1,625          $1,650
                   Number issued                                                                       9                    e

                aData from AIRS data base as of May 1988

                bData from state office summarres of quarterly reports prepared manually by field offtces.
                ‘Produchon      venficatron InspectIons
                dData relate to all mspectlons performed. Information IS not available by type of inspection
                eNot reported




                Page 69                                                      GAO/RCRD-90-99Production Verification
Appendix VII

CommentsFrom the Department of the Interior


Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.                       United States Department of the Interior
                                                                 OFFICE OF THE SECRETARY
                                                                  WASHINGTON,  D.C. !&M‘l




                             Mr. .lan.es Duffus,       III
                             Director,       Natural   Resources
                                Management Issues
                             General      Accounting    Oiflce
                             vlashington,      D.C.    20548

                             Dear   Mr.   Duffus:

                             The Department       appreciates        the opportunity           to review     the General     Accounting
                             Office     (GAO) draft     report,      dINERAL REVENUEb: "Shortcomings                 in Onsnore Feaeral
                             Oil and Gas Production           Verification"         (fAO/RCEU-YU-9Y).           General    and specitic
                             comments prepared        by   both toe tiureau "t Land Management (KM)                     and the Minerals
                             Management Service          (MMS) on the dratt           report's      findings     and recommendations
                             are enclosed      for your incorporation             loto the final          GAO report.      The general
                             comments included        in Enclosure          1 are meant to inform            GAO about   the
                             complexities      and lnterrelatlonshlps             tound in an integrated            minerals     program as
                             they relate     to the findings.             Enclosure      L provides       our response     to the
                             recommendations.         Enclosure        3 outlines       some specific        comments by paragraph       on
                             the findings.

                             We also appreciate            the time and erfort            your auditors      spent in meeting with
                             members of BLM 01, March I, IYYU, to                   clarity    the issues,         to ensure mutual
                             understanding           of the report     content      and to Inform       your auditors       of t&H's
                             recent      lnitiarives       implementea     prior      to and since completion            of this report.
                             My staff        informs    me thaL the meeting           was extremely        positive    and beneficial      to
                             all    involved.        We especially     apprecidte         the proiessionalism         an" cooperative
                             attitude        displayed     by your staff.

See comment 1                Se assure"         that through       "ngo'ng    Internal       reviews    and responses      to other audits
                             and investigations,             i)LM has direaay        recognized       a number of the program
                             deticiencies          which your report        identifies,          an" we are taking      aggressive
                             actions        to remedy those drriciencies.               We are implementing         important
                             initiatives,          several     of which respond directly              to your recommendations,          to
                             strengthen         our Inspection        an" ontorcement          (I&E) program.       As a result,       we
                             agree in general            with all "t your recommendations.                  borne of the tindings
                             relate       to problem areas ot whlcn we were previously                      unaware,    uhlcn turfher
                             validates        this    report     and allows     timely     inlciatlon     "t corrective       actions.

                             We agree     that:

                                   I.  Current    inspection        procedures need to be unproved     to provide   adequate
                             dssuran~e     of productlo"      verlrlcation.     A BLM task force     has recently   completed
                             a comprehensive      review     ot BLm's IhE strategy.      The findings    of that task torte
                             arc currently     under management consideration         tar a decision.       ELM has




                                     page71                                                            GAO/RCED9099ProductionVeriflcation
   Appendix VU
   comments From the Department of
   the Interior




                                                                                                      1


Chauter     2 - Productim         Verificatim

Tfie discussims           between our respective            staffs    were very positive
and      cmstructive            in     developing        a rmtual         mderstandiw            of
"prcductim           varificatim"           and what might            cmstitute          a more
effective        inspection          program     to adeguately          ensure       prcductim
verification.          This is probably the single key issue that bss been
raised m a recurring                basis as a failing         in the inplanentatim            of
Interior's       Inspactim          and Pnforc-t          Progrsm.      We all agree that
verifying       all production          in its pure sense -                  witnessing      each
and every sales transactim,                 verifying     recorded infonwztim            m the
spot,      and reviawing          and &paring         evary sales,        maasurermnt,        and
prcductim          record       to msure         the informtim             is accurate         and
consistent.        However, we are cmvincsd                that we all csn agree that
this     is a prohibitively              costly    task.      Inportantly,         we also can
agree that BIN needs to do mDre than what is reguirad                                  under the
current       inspectim          strategy      and that can be accarplishad                  with
current      resources to adeguately              ensure productim          verificatim.

BIM believes       that mny inspectim        actims,        alme or together,      my
constitute      a progrm     of productim        verificatim.          These actims
include       witnessing     or    indepmdmtly             cmducting       msasuremmt
activities       such as tank        gawing       to ensure         accuracy,    proper
technigue,     end proper eguipncnt;      witnessing        gas mater calibratims
to ensure mter accuracy;          witnessing      oil mater provings         to ensure
accurate     metering;    carparisms      of sales records with productim
reports     and other operator       masur-t            records:     and independant
calculation      of gas productim     frm gas productim           recording charts.
All of these actions         are currently       part of BIM'S program but in
varying     degrees of arphasis      and priority.

BIN developsd the suet stringent          form of prcductim       verificatim
inspectim--a      smth-long      study of a lease operatim              involving
witnessing   and verifying      each and every sales transaction,          callad
a WI, and incorporated         it into inspectim       strategies   during the
past several    years.      These inspections     have hem utilized         in the
past both to resolve production        accountability     problenr discovered
through other inspectims           and m a randan spot-check           basis for
'productim    verificatim."




                                                                                 Enclosure l-1




      Page 73                                                         GAO/ECEDPO-99Pmductlon Vedficatlon
                      Appendix VII
                      Comments From the Department of
                      the Interior




                 Chapter   5 - BUUMMS Coooeration

                 In mst instances,    it is clear to the reader              that a perceived  lack
                 of cooperation    between BU4 and MIS rmy                   be mre    a mtter      of
                 misunderstanding  between the agencies.

                 We agree that a joint evaluation     of the Memrandun of Understanding
                 (&KU) would bs very ccmstructive.        Specifically      identified  in the
                 BtN/M?+lS/BIA KU is a section    that outlines       working procedures and
                 authority   for a Joint Steering Ctittee        whose sole responsibility
                 is to oversee iwlmentaticm        of the base mxl docment.            *oush
                 this Camittee    and since the present audit, ELM and MS have worked
                 to address each other’s    concerns.

                 AlSO, we believe          that the conclusion          at the end of the secmd
                 paragraph,       page 2, “Little      has changed in the intervening           7 years”
See comment 4.   may be an overstatemnt.                      page 23 describes         sane of MS’s
                 responsibilities,        but it does not address m’s              aut-ted       reviews
See comment 5.
                 of royalty payments and reporting,              and MS’s tribal      royalty amlits.
                 Together,      these efforts     have resulted      in additional     collections     of
                 mre than $634 millim             during those intervening          years.      While we
                 concur that productim            verification      is sn inportant       carpcnent     of
                 the overall       royalty mnag-t           process, the Department clearly          does
                 not petmit ‘I. .          the oil and gas industry           to operate essentially
                 onanhonorsystan.              .      .”

                 We agree that there are very valid            pros and cons regarding       the
See comment 1.   alternatives      for plac-t      of the I&E function.             However, we
                 strongly     believe     that the     I&E function    is    integral     to and
                 interdependent      with the operatimal      approval function.       As such,
                 it cannot be efficiently        split    fran W's      overall    oil   and gas
                 -g-t          program.

                 The inspection      and enforc-t       functions      for oil and gas operations
                 of Federal and Indian lands were transferred                   to BIN fran the l4fS
                 in 1982. The reasms for that transfer                were: 1) the inspection       and
                 enforcement functicm is integral          to BLN's mltiple         use and resource
                 protection     decisions:     2) retaining       all     operations    and resource
                 oversight    functions      in a single       agency streamlines         interagency
                 -g-t          relationships      and provides better service to the public
                 and the Indians.




                                                                                                hclosure     1-3




                       Page 75                                                   GAO/BcED-W98 Pmductlon VerIfIcatlon
      Appendix VII
      CommentsFrom the Department of
      the Interior




    Inspection      and hforcmt              Strategy     and a determination     of the
    personnel     and resources needed to implement any revisions                 to the
    Strategy.      RIM has determined that previous c amwndable efforts                 to
    redirect    existing      and even shrinking        resources in order to address
    imnediate priorities          through changes in priorities          and procedures
    have opened BIN to criticism              for the work foregone or incarpletely
    covered and steadily              reduced RIM credibility          both within      and
    outside     the Department.              A BIM task force         has evaluated      the
    effectiveness         of current       procedures,     especially   with regard to
    production        accountability,          and has developed          those   revised
    procedures      that need to be ccmducted in order to address the
    r-ring          criticiwrs         of    the    progrsm     and provide     effective
    production     verification.          Secmd, the task force developed a range
    of levels of inspection            goals for consideration.        Last, BU4’s task
    force estimated the manpower and resources that would be needed to
    inplenent     the individual         Strategy    options.

    The task force findings             are in agreesant with those of the OIC and
    ORO, that        the present          Strategy       does not provide              for adequate
    frequency            of        witnessing                measurement               actions              or
    measurenant/production               record        reviews         and       ccmparisma ,            or
    procedures that require those acticms to be conducted routinely                                   to
    ensure production         accountability.             The BIN is considering               revised
    procedures      that incorporate           those actions          cm a routine         basis and
    also increased frequency of conducting those inspection                            procedures.
    Further,      the BLM is considering                  task force          recamwndations            to
    provide the field offices             the flexibility          to conduct such intensive
    inspecticcs       on a significant            swlpling       of all our leases,              rather
    than repeatedly          conducting         such inspections               on the same high
    priority     leases annually as is r-red                   under the present Strategy.
    Low producing         leases,      which represent            nearly      90 percent         of the
    producing       1eases, pose potentially                  higher       risks    of production
    accountability        problars       because of the present                  low frequency         of
    inspections        on then.          With this         change, such leases would be
    inspected      on a less predictable              basis,      which would significantly
    increase the effectiveness               of the SIM inspection
    program.      Also with regard to production                 accountability         under BIM’s
     Indian trust       responsibilities,           the task force has recaunended a
    change that all producing                Indian leases be inspected                 annually        in
    order     to mOre fully               protect        the     Indian        mineral       interests.
    Recannended revisions             if approved will              significantly         strengthen
    BIM’s ability        to ensure production             accountability.




                                                                                  Enclosure       2-2




L
       Page 77                                                             GAO/BCEIWW9 Production Veriflcatlon
          Appendix VII
          CommentsFrom the Department of
          the Interior




Developing            Proposed                  Rulemaking            to      Increase             Operator         Role         in
Production           Verification

ELM is        preparing      proposed      changes     to Onshore Oil and Gas Order Nos.
3, 4, and         5 to   require     increased       operator         verification          of purchaser
measurement          actions     and retention         of records            for    BLtl review.       Since
operators         have a 7/Bths            interest       in      the    oil      and gas      sold,     they
should       take    a more active           role   in verifying              the production          sold.
This    will      supplement       ELM inspection             efforts         to verify       production.

E_valuating          the          Feasibility              of   Contract          Inspections

ELM is evaluating            the cost    effectiveness         and feasibility           of using
contract     inspectors           as a means of extending                  I&E coverage.           A
Request  for      Information         has been       prepared      for    publication       in the
Commerce   Business         Daily   to determine         the availability           of commercial
sources  for     inspections.

Consolidation               of      Inspector          Resources            for    Efficiency           to be Evaluat..

BLM will         evaluate              and      identify         those       areas       where        consolidation              or
sharing        of inspector           resources        between    offices     would    provide      more
cost     effective         coverage        of inspection        goals     and more efficient         use
of    inspector          resources,         enhance       the necessary       close    coordination
between        inspectors          and engineers          and ensure      the maximum capability
for     on-the-job          training       and ‘mentoring”          by experienced        personnel.
For       those       offices         where      efficiencies           can   be    improved,        the
appropriate           actions        will    be initiated.

C_onsidering           Stricter              Penalties

BLM      is   preparing       a Notice       of    Intent       soliciting             information
Iregarding      the utility       of a Proposed      Rulemaking           to add instances           Iof
noncompliance           to the      existing    regulations           for      which       immediatr
monetary       fines      can be imposed.           The    proposed          rulemaking         would
include       provisions       to      crack  down      on    repeat            offenders         with
immediate          monetary              fines       under        certain         criteria.

                                    CHAPTER 3 - J&E PROGRAM OVERSIGHT


R&ZzENDATION

 “To    ensure             that         BLM’s      inspection       and enforcement              program                         is
consistently                 implemented,               we recommend       that       the     Secretary                          of
Interior           require               the     Director      of    BLM    to     strengthen           program
oversight,           including               the   following      specific     actions:

    -.-    develop   standard                   guidelines         for state             offices        program       reviews
           and conduct      such                 reviews        annually:

                                                                                                        Enclosure          Z-4




           Page 79                                                                     GAO/RCElMO-99 Production Verifkation
           Appendix W
           Comments From the Department of
           the Interior




TPR Guidelines           Being Developed

TPF! guidelines     are currently      being developed by the BLtf I40 for adequate State
oversight     of the field     level 1% program.       This guidance will greatly    enhance
nationwide      consistency.      accountability.    and the ability    to identify      area-
specific    program weaknesses and resource allocation        needs for prompt correction.
TPR evaluation      criteria     uill  also be supplemented by the issuance of the I&E
manual and handbooks         for ELM’s Onshore      Oil and Gas Orders.     which are also
currently     being developed.

Internal      Control      Reviews Scheduled

The BLli UO will conduct an Internal   Control Review of the Indian portion of the
I&E program, due to be completed in July 1991. followed by an hlternative
Internal  Control Review (NCR) of the Federal     lands I&E prograII during FY 1991
and 1992. due to be completed    in July 1992.

Review of CInnual Field             Office   I&E Plans

After  the revised    IIE Strategy    is finalized      by BLli Uashington.     field offices
will be asked to prepare and to submit an annual plan for accomplishing                  current
I&E program objectives.      These annual plans will be reviewed by BLH Headquarters
to aesure consistency     with the overall     Inspection/Enforcement       program strategy
and objectives.     Field Offices nil1 subsequently          provide  quarterly      reports to
provide a basis for assessing actual performance             against the annual plan.           In
this manner. BLli Uashington will monitor field accomplishments and provide                   the
necessary program oversight       over field I&E activities.

Field      flssistance     Visits    Under   Consideration

BLH will       considerinstituting      a program of Field hssistance             Visits    by a sw.11
team of inspectors        led by Uashington           Office     personnel    to assist      the field
offices in resolving       I&E program implementation            problems, to provide on-the-job
training,    and to ensure consistent        understanding         and implementation     of technical
policies    and guidance.        The team will     assist the field offices            in identifying
needed    prograe    improvements,        which     the    offices      vi11   be responsible         for
implementing.
flanager      Training     Beins Developed

An “I&E for Itanagers’        cour?.e is being developed     by the Bureau’s    Phoenix Training
Center   to better      educate    supervisors     and managers    in the specific    workings   of
the program.       interrelationships          with other   portions    of the Fluid      Minerals
Program.   and the recent initiatives             outlined here.     The course should be ready
for implementation        in early FY 1991.




                                                                                  Enclosure    2-6




            Page 81                                                 GAO/ECED-9099 Production Verifkation
         AppendLx W
         commente       From the Department                of
         the Interh




clearly   communicated to the field     office   in subsequently     issued   Oirectives.
Data in the MRS system nil1 be used for development, implementation,           and follow
up for the annual IBE strategy,  replace     the Ouarterly  Inspection    and Enforcement
report,    be used to record all drilling,    production,      and abandonment inspections,
and issuance and followup       of all BLli initiated     enforcement    actions,  approvals,
etc.    In addition,   and most important,    it will be used as a work load analysis,
budget,    end resource allocation     tool by all organizational       levels including    the
Vashington     Office.

BLM to Require        Mtoration          Skills

The BLll has recently       placed a considerable      emphasis on automated system use and
computer literacy        as evidenced    in a recent     requirement   for all staff     to have
elewnts     on dutoeation     skills  and understanding      in all Position  Oescriptions    and
Performance     fippraisdls     as well as inclusion       of an automation    element     in all
employees Individual        Ocvelopeent Plans.

wtl   is Ocvalo~ino         AIRS Oatrbase           Duality        Assurance        Plan

An 1IRS Data Ouality Assurance Plan is currently   being                                   developed      to ensure       that
d comprehensive set of procedures  is in place for data                                    entry.    verification.         and
use. The plan nil1 contain guidance on the following                                       subjects:

        0        Timeliness       of     data      entry        and review     of    those     data.

        0       Responsibility               for       verification            and         compliance          at    various
                organizational            levels.

        0       Identification       of data elements for which data is: required      to be
                entered     and is critical   to the program requiring  the highest   degree
                of accuracy;         required   to be entered   but not critical    and not
                requiring      as high a level of accuracy;   and data elements available
                for field      use but data is not required   to be entered.

        0        Reports      required          to be run in AIRS and frequency                        of such reports       to
                 enable      determination           of data quality levels.

        0        Hardware       and software           configuration           management         directives.

        0        System      documentation.

        0        User      documentation.

        0        Data security           procedures.




                                                                                                       Enclosure    2-B




            Page 83                                                                   GAO/RC’ED-90-99           Production Verification
   Appendix       W
   CkmunentsFxomtheDepartmentof
   the Interior




        *I__      mmitor         field        office      cmpliance       with    the    minincn
                   requirmts                and      procedures     to     ensure     consistent
                   inplanslltation"

BU4 to Continue           Cnuoino Mcnitorina           of I)atsbaa~
Once fonml and centralized          9uidance is established        cm data
standards,    requirements,   and procedures, monitoring       of field office
compliance will occur throqh Washington Office          staff participation
in AIQ?'s,      ICR's, end TPR's es requested.          Service Center Staff
will    also be directed    to continue to monitor the AIRS database on
a high level to review critical          data elements as identified       by the
Washington Office.          Additional      monitoring  will      take place as
offices     are reviewed      for     their   cmlisnce       with     the Quality
Assurance Plan.


        II-_       reconsider  additional AIRS edits                to    further   insure      the
                    accuracy of the AIRS data."

Maxinun        Edits   in Place      with     AIRS Version      3.00 in May 1990

With the irrpl-tation           of AIRS Release 3.00 scheduled for
nationwide      release in May 1990, the Iraximun nunber of individual
field edits Will be in place in AIRS. Open and close dates are now
edited individually.          Sure fields     such as inspector       name or IID
cannot be edited        carpletely      because of the wide variation            of
possible      values.     Interactive     edits    between two or mDre date
el-ts        are being planned for inclusion         in a rewrite     of the AIRS
system in FY 1991.           An emle       of an interactive        edit would be
editing    the production      rating  for inspection     priority    against the
productim      values for average oil and gas in the same section.              In
addition     to these edits,     a nuker    of reports have been implanented
in previous AIRS releases to identify           to the field areas where data
is in need of further         cleanup, such as inspections         not closed out
or arpty inspections.


                                -5-WMS                        CXXXEZATICN




"We recannend that   the Secretary    of the Interior      require   the
Directors of BIM and mS to jointly      evaluate   whether the current
Mmxxandun of Understanding   adequately     addresses BLM's concerns
regarding tiITElinwS and law enforcanwt."


                                                                              hclosure       Z-10




    Page 86                                                              GAO/RCED-9@99       Production Veriikation
                             Appendix M
                             commenta Fmm the Department of
                             the Interior




                                                       SPECIFIC OxmTS          ON FINDINGS

                     Penal tv Raluoticm

                     Page 22, line 8:        The State               Director  is not unpowered to reduce
See comment 4.       penalties.      Suggest placing                  a period    after “assessments” and
                     deleting   “or penalties.”

                     Jurisdiction       for   Kansas

                     Page 24, last paragraph:  Kansas is mder                      the jurisdiction of the
                     New Mexico State Office.   Delete “Ranma”                      fran the Wyaning group
                     and add “Kansas” to the New Mexico group.

                     Pilot     Produotivitv      Districts
                     Page 31, line      5:   It should be stated    that   tha Rock Springs
                     District   is one of two districts        in a test     program and iS
                     authorized   to mxlify Bureau standards in conducting its regulatory
                     program.



                     Page 35, last paragraph:        Suggest a rewrite    of the second, third,
                     and fourth       sentences.      ‘When the Inspection       and hforcment
                     Division   was disbandad, its chief was transferred       to a State Office
                     and the staff      was merged into the Division        of Mineral     Lease and
                     Reservoir    &nag-t.           These staff   menbers continued       providing
                     technical,     procedural,   and policy    advice to all     field     offices.
                     They received,         for  camsnt , copies       of State     Office       annual
                     inspection    plans.     One of the staff mm&et-s told us . . . .‘I

                     Editorial

                     Page 39, second paragraph,               line     6: Insert   “had”   between “they”   and
                     “confidence.”

                     _Prioritv      Rankiw    Errors      Clarified
See comment 3        Page 53, next to last paragraph:          The gravity      of the statement at
                     the top of page 52 is not supported by the findings.                  If a total
                     of 209 (151 + 58) leases               were indeed        incorrectly     assigned
                     priorities,    the error rate for the total nunher of leases reviewed
                     (5990) is less than 3.5 percent.            The report indicates       58 leases
                     were incorrectly     assigned a low priority        and 323 (474 - 151) were
                     properly    reported as high priority.        Therefore,     15 percent (58 of
                     323) of the high priority        leases would have been miscodad.              TbiS
                     error rate my not be laudatory,         but neither     does it support GAO’s
                     findings     in this    section.      Additionally,      the conclusion        that
See comment 7        mproper ranking occurred was based on a carparison              of the priority


                                                                                                       Enclosure   ?-?




                 t



                              Page 87                                                      GAO/RCED8@88 Production Verification
                     Appendk VJI
                     Comments From the Department of
                     the Interior




                 Jurisdiction   for   Kansas

See comment 4.   Page 73:  Delete Kansas       fran    the Wyting     grouP and add Kansas to
                 the New Mexico group.

                 Pages 74 and 75, sticript        b:    Add Kansas.

                 Pages 74 and 75, subscript       c:    Delete   Ksnsss.




                                                                                           Enclosure   3-3




                      Page 89                                              GAO/RCED80.98      Reduction   Verification
Appendix VII
CmnmentaFrom the Department of
the Interior




However, we continue to believe that because BLM does not ensure that
oil and gas production is accurately reported for the computation of roy-
alties, the industry is essentially operating on an honor system.

6. Interior is correct that it does not have authority under FOGRMA to use
probability sampling of high-priority leases to satisfy the requirement
for annual inspections of such leases. We have modified our recommen-
dations in chapter 2 to urge Interior to consider sampling as it revises its
inspection strategy, and if Interior determines that sampling may be
more effective than annual inspections of all high-priority leases, Inte-
rior should ask the Congress to amend KARMA accordingly.

7. Interior stated that for some leases in AIRS, priority rankings were
changed, but not the production data for those leases. Therefore,
according to Interior, the priorities may be correct, regardless of the pro-
duction data found in AIRS. For our analysis, we used AIRS production
and compliance data to determine whether the inspection priorities in
AIRS were correct. Because we found that priorities in AIRS often did not
agree with production and compliance data, we concluded that AIRSwas
unreliable as a management tool for determining whether inspection pri-
orities were correct. We clarified this matter in chapter 4.

8. Interior stated that use of oral warnings has not been authorized on a
nationwide basis. However, we found that in 1988 BLM formally adopted
the recommendations of its 1986 task force, one of which was to
authorize the use of oral warnings. Subsequently, we discussed this
matter with BLhfs Chief, Compliance and Operations Branch. He said
that Interior’s comment was incorrect. Therefore, we made no change to
the report.

 9. Interior said that written orders do count against operators’ compli-
 ance histories and are tracked in AIRS. However, in 1988 BLhf formally
 adopted its 1986 task force recommendations, one of which stated that
 written orders do not carry either the inherent threat of monetary pen-
 alties or the negative connotation of citations. Subsequently, we dis-
 cussed this matter with BLM'S Chief, Compliance and Operations Branch.
 He said that Interior’s comment was incorrect. Therefore, we made no
 change to the report.

 10. Interior expressed concern that AIRS should not be expected to track
 enforcement actions, such as court judgments, against operators, if they
 occur outside of BLM. Subsequently, we discussed this matter with BLM'S
 Chief, Compliance and Operations Branch. We agree that BLM should not


 Page 91                                   GAO,‘RCED90-99Production Verification
@ndix      VIII

Major Contributors to This Report


                        Robert W. Wilson, Assistant Director
Resources,              Leonard W. Ellis, Assignment Manager
Community, and
Economic
Development Division,
Washington, D.C.

                        Sue Ellen Naiberk, Evaluator-in-Charge
Denver Regional         Kathleen Arnold, Site Senior
Office                  Felicia Turner, Programmer Analyst




(140241)                Page 93                                  GAO/RCED-8@98Rodnctlon VerIflcation
Appendix WI
Comments From the Department   of
the Interior




be expected to track actions that do not involve federal or Indian leases.
The branch chief told us that external enforcement actions involving
federal or Indian leases are usually recognized and handled by means of
direct instructions to appropriate field offices to increase the number of
inspections on affected leases. However, we believe that all enforcement
actions involving federal or Indian leases should be part of operators’
compliance histories and therefore should be recorded in AIRS,BLM'S offi-
cial data base for the inspection and enforcement program. We have
revised chapter 4 accordingly.




Page 92                                   GAO/R-9B      Production   Vcwiflcatio,,
               AppendixVII
               C!ommentsFromtheDepartmentof
               the Interior




               The following are GAO'S comments on the Department of the Interior’s
               letter dated April 5, 1990.


               1. Interior agreed, in general, with all of this report’s recommendations
GAO Comments   and noted that BLM has taken or planned several actions to address our
               concerns. We have not verified these actions, nor have we evaluated
               their effect on the program. However, we believe that if these actions
               are effectively implemented, they will significantly improve the inspec-
               tion and enforcement program. We have recognized Interior’s actions in
               chapter 6.

               2. Interior disagreed with our statement that the results of its 1986 test
               of production verification inspections could be interpreted to show that
               such inspections are cost-effective. Interior noted that the one lease for
               which additional royalties were collected was not randomly selected.
               However, as we pointed out, BLM was unable to document how any of
               the inspected leases were selected, including whether they were high-
               priority leases. Because of this, we concluded that BLM should not use
               that test to draw conclusions about the usefulness of random production
               verification inspections. Nevertheless, we are pleased to see that Inte-
               rior has identified several corrective actions BLM has taken or planned to
               improve its inspection strategy, including consideration of random pro-
               duction verification inspections. If BLM'S corrective actions are effec-
               tively implemented, they will address some of our concerns.

               3. Interior commented that we had overstated the seriousness of the
               effect of AIRSdata errors in the management of the inspection and
               enforcement program. However, we still believe that the quantity and
               types of data errors that we found make AIRS of limited use in managing
               the program. We modified our statement in chapter 4 to clarify our
               view. Regardless, Interior identified several corrective actions BLM has
               taken or planned to improve its management of AIRS,including measures
               to improve data accuracy. If BLM's corrective actions are effectively
               implemented, they will address some of our concerns.

               4. Changes have been made to the report in response to certain com-
               ments in Interior’s letter.

               5. Interior disagreed with our statement that because BLM does not
               ensure accurate reporting of production, the oil and gas industry essen-
               tially operates on an honor system. Our report recognizes that other
               functions within Interior help ensure accurate reporting of royalties.


               page90                                    GAO/RCED9099ProductionVerification
                  coded in the database against the average production                 coded in the
                  database.     The priorities      assigned are in all likelihood              correct
                  even though the seven rating           factors   aud the average oil and gas
                  production   values may not appear to support that priority                 ranking.
                  Ccmparisou of actual production           values against the coded priority
                  was not evaluated      by GAC. 1n most cases the field                 offices     have
                  been fomd to be updating           only the overall     priority      ranking each
                  year and not correctly        updating     all other fields       in the priority
                  section,   including      the oil     and gas production         values.        mture
                  directives    will   reguire    this data to bs uPdated at a specified
                  frequency.

                  Checklist      Errors   Clarified

See comment 3.    Page 58, last paragraph:         Again, the gravity     of the statement    is
                  not supported      by the findings.        The errors    referenced    in this
                  section     are errors   on the 40-item checklist      section    of the AIRS
                  data.       Rather than expressing      the error    rate in tern        of the
                  Percent of checklists       that had an error in any record (71 of 199
                  or 36 percent),      the error rate should bs expressed in tenus of the
                  percentage of data el-ts          that were in error.      In the event that
                  there was an average of as may as five errors in each checklist
                  that ccmtained at least one error,         this would result     in a rate of
                  five errors times 71 checklists        out of 40 data elements times 199
                  checklists,     or less than 4.5 percent (355 of 7960).

                  eS2lforcamlt                          Clarifi

                  Page 60, third paragraph:             Informal    enforcanent     actions have not
See comment 8     been sanctioned     by this office.          A few offices      have been approved
                  to use verbal warnings cm a trial              basis, but this policy          has not
                  been i&-ted           on a nationwide        basis.     Written    orders do count
                  against au operator’s       noucanpliauce       record.    This is considered an
                  enforcanent   action and as such is docummted and tracked in AIRS.
See comment 9.    All enforcement      actims     initiated      by the BIM will         be tracked in
                  AIRS.

See comment 10.   Page 60. fourth       Paragraph:      AIRS was not designed      to track
                  enforcerent  actions outside the BIN. Any enforcanent      action issued
                  by the local      BIN office     can be tracked     up to and including
                  correction,   and if appealed to the State Director        or IBLA.    Any
                  other actions such as court judgments would not be appropriate          to
                  include in the AIRS data base and would be inconsistent          with the
                  current use of AIRS data.      These actions would not have any inpact
                  on an operator’s    ccnpliauce   history  and/or development of the ILE
                  strategy.




                                                                                             Fnclosure 3-2




                     Page 88                                                  GAO/RC~SO-W Production Verif¶cation
          AppendixVII
          CommentaFromtheDepartmentof
          the Interior




ue agree      that   some areas           of cooperation                                    and   information              exchange
need    improvement,        although           efforts                             over       the     past    6        years     have
reduced     such   problems       significantly.

To    promote           closer   coordination           between      FIMS                             and     ELM      and       ensure
responsive             action by both         agencies      concerning                                 administration          of a
minerals         program    that      adequately        accounts       and                             verifies       production
volumes         and payment       of correct         royalties,        BLM                             and MMS will        pursue
the     following           actions.

MMS/BLPl        Cross        Training           Efforts             Will         be       Increased

cross       training         for appropriate          personnel     to enhance                                      understanding
of   the      other        Bureau's       procedures        will  be increased.                                           This       will
improve         timeliness          of   royalty      and production        data                                   access,          which
greatly          facilitates           ELM's      production      accountability                                         and        MMS's
royalty         determination           functions.

MF(S/BLtl Meetina                  on Law        Enforcement                  Scheduled

A meeting           has      been        scheduled             for         April           1990,       between        MMS and ELM
to discuss              better          coordination                 in      law       enforcement               matters.     This
meeting        is  part                   of      continuing
                                                     discussions          to improve       the
coordination      between      the Bureaus      on matters       pertaining    to criminal
investigations        related       to the extraction       and sale of both Federal-
and Indian-owned          minerals.

Steering         Committee               Will      Review            the      Current           MOU

The GAO’s    concerns                    regarding             the         effectiveness                 of   the    ELH/MMS/BIA
MOU for   interagency                       information                     sharing           will       be    brought     to    the
Steering          Committee              at     the     next         meeting.

We expect           that         the    Steering          Committee   will                    initiate           a review        of the
MOU and    make     any                  necessary          improvements                       or changes        to            enhance
timely  interagency                       information                exchange               and the   effectiveness                    of
coordination               of      criminal           investigations.

We will          inform           YOU     of    the       results             of      our     next       Steering         Committee
Meeting          and keep you                   advised             as      to      our      efforts          and      progress     in
improving          interagency                  cooperation                  and      information             sharings.




                                                                                                                 Enclosure          2-11




           Page86                                                                             GAO/RCED-90-99ProductionVerifieation
     Appendix VU
     Comments From the Department of
     the Interior




        ‘I--    develop     and issue   guidance      providing     miniman AIRS
                 requirements and procedures,    including    procedure5 to open
                 and close inspection   records and to verify        the accuracy
                 of data entered into AIRS”

 < to Pr
BIN

Since the initiation          of the GAO review in May of 1988, additional
guidance       has     been      issued    regarding      AIRS     requirements       and
procedures.        During the period of May 1988 through March 1990
Instruction      Memxanda have been issued to the field giving specific
guidance regarding         minim      standards and procedures         for AIRS data
entry and use.         These directives        cover topics such as entry of
inspection      item identifications         (IID) by type of agreement, well
status,     formtion,       cmpletion      codes, operator       name changes, IhE
strategy     development      inplemantation      and tracking,      open and close
dates, effective        dates for changes and noncarpliance          actions,   legal
land descriptions,         and other issues identified          as needing further
guidance.       Previously      issued guidance is currently          being canpiled
and reviewed         and will       be reissued      as a part       of the Bureau’s
directives      system.

AI
5       Pr     ram U   tad                                    rts
In addition  to these directives,    new versiona     of AIRS have been
released to the field,   with another mjor    release planned for May
1990. The issued releases included additional       reports to identify
data in need of cleanup.

AIRS User Grout Formed

In addition    to the actions listed above, an AIRS and MRO user group
has been famed bs of May 1989.             Tbis user group cqrises     field
office   representatives      from the nine BIM State Offices     that have
AIRS databases.          These individuals     are inspectors,   data entry
clerks,    and -gem         using AIRS data.      Sane of the factions      of
the group are to identify        weakness in AIRS data and data standards
as well as identification         of needed data edits.

BIN Increases      Efforts    to Validate     Database

Efforts     to verify      the accuracy       of the AIRS database have been
initiated      and will    continue.      Three State Office TPR’s have been
conducted in the last year in which AIRS data has been reviewed
for     consistency     and problem        areas identified     for    correction.
Additionally,       a project    to verify     the accuracy of the data and to
in-prove the quality          of data Bureauwide          for selected     critical
e1Rmmts was ccmp1eted.

                                                                         Enclosure     2-9




     Page 84                                                 GAO/RCED-99-99 Production Verification
            Appendix VII
            commenta From the Department of
            the Interior




Nationwide        I&E Uorkshop            Scheduled

A nationuide         I&E workshop is scheduled      to bring prograa sanagers       as uell as on-
the-ground        inspectors   together   to create consistent    understanding     of the new I&E
strategy        and related     Onshore   Orders,    and discuss   prograa probles areas and
feasible       solutions.      Results of the workshop will be distributed            to all field
offices        and will     provide     a basis    for consistent      administration      and TPR
evaluation        criteria   of select   progras   corponents.

Supervisory         Position           Description     Standards    to    be Reviewed

AS a result      of both a program           evaluation      scoping done by the FJLtl Division             of
Program Evaluation         and an AICR conducted          by the Division       of Fluid Mineral Lease
and Reservoir      tianagenent,       recossendation       ~a.8 sade for the enhancement            of field
supervisor       and     l anageeent        expertise.          The     RICR contains          a specific
recommendation        for revision         of position       descriptions      (PO) for      field    office
personnel     directly      involved      in I&E program        supervision       and sanagesent.          The
revised PO standards          uill     incorporate     criteria      for technical     expertise.        This
effort   will be expanded to incorporate                an evaluation       of supervisor        review and
documentation      standards       included in the above recossendation.

Staffing        Level       Analysis       and Revision

8Ltl is       currently     developing     revisions  to the I&E strategy,     which    identify
aggregate        field   staffing    levels necessary    to accomplish alternate     inspection
frequency       options.      The Director will make a decision on iaplenenting       one of the
strategy       option proposals in the near future.

BLll uill       subsequently    review and further           define     I&E staffing     levels   and develop
standard        criteria     by which       sanagers    will      be able     to determine      field   office
specific        staffing    and resource allocation              needs.     These criteria       will consist
of item          such as well inventory              and type.       anticipated      future     development,
technical        inspection    difficulties,        and diversity        of operations      for a given area.



                                            CHRPTER 4 - RIRS/HRO PROGRM


The following              3 actions       respond    generally    to    all   of   the   recommendations    in this
chapter.

AIRS Database              USC to Increase

 8Lll believes    that the quality     of the data in any autosated   system is directly
 tied    to the    user’s  understanding     and use of the system        and data.      The
 requirement    to use MRS as a workload       and program managesent   tool will   be



                                                                                                Enclosure   2-7




              Page 82                                                               GAO/RCED.90.99 Production Verification
    Appendix VII
    Comments From the Department of
    the Interior




   --    establish   minim      standards for supervisory              responsibilities,
         expectations,     review and docmen tation:

   --    evaluate      current        staffing       levels     and       develop     staffing
         standards”

RESPONSE
BIN recognizes        that   insufficient   program      oversight      has been
provided   for the I&E program since 1987 at all levels.                 Tbis has
been borne out by B&l’s own internal        review conducted in the third
quarter   of 1989, as well as by the Report of the Office                   of the
Inspector     General    on the I&E and Related          Programs and by the
subject    report.     Early   in the third      quarter      of FY 1989, BIM
initiated    a nunber of actions to substantially          strengthen    program
oversight   at all levels and has developed additional            actions since
that tima.      These program initiatives     are described       below.

Field     Office   Technical        and Procedural      Reviews     Initiated

Beginning       in April          1989, several        State    Offices     initiated         or
scheduled fomal Technical               and Procedural Reviews (TPR’s) of field
office I&E prcqrarm.             In addition,      as indicated    in the report,        some
BIM field      offices     have had longstanding          and continuing     progr-         of
field    office     review. During the remainder of FI 1989, 12 district
office3      in 5 States were reviewed.                   Of those FY 1989 reviews,
Washington Office personnel participated                    in three reviews.
Six district        offices     in five States have been or are scheduled to
be reviewed in FY 1990, and Washington Office                      (WO) personnel have
or will participate           in a n&r         of these reviews.         We believe       this
1s a very strong              effort      on the part        of the field         offices      to
significantly         strengthen       oversight     of the I&E program, and that
Washington Office           participation        in a significant       nurber of these
reviews will         serve as one of several               mechanisms to ensure nvre
program consistency.

Increase      Prwram     Staffinq      at the Washinqton          Level

Ability    by the BLM Headquarters    to participate    in field   TPR’s has
recently     been enhanced by the addition        of two I&E positions       in
BUl’s Division      of Fluid Mineral    Lease and Reservoir      &nag-t.
These two positions     are XI program guidance and oversight.       Further
field    support   by the BIN WO will     cane fran the added technical
engineering,     and AIRS/MRO expertise    recently   acquired by the BIN
wo.




                                                                                      Enclosure     2-5




        Page 80                                                       GAO/RCED-90-99Production Verification
       Appendix M
       CommentsFromtheDepartmentof
       the Interior




The revised       strategy      options    also include      the staffing    and funding
estimates      to meet inspection          goals  and objectives.         The task force
review     recognized      the need for increased         numbers of accountability
inspections        and also      for a balanced      program     to include     drilling,
abandonment,          and    environmental       and    public     health    and       safety
inspections.

Peer   Review     and Validation         of   Inspection         Strateay

BLM plans    to validate   its   inspection                Strategy        by convening      a peer
review   group to evaluate     the proposed                revised       inspection     Strategy.

M
i n‘ um      Me urement          and
Recently     Issued

BLM has also addressed    the issue  of production       verification       through
Issuance  of Onshore   Order No. 3 (Site    Security),         and Onshore Order
Nos. 4 and 5 (oil   and gas measurement    respectively)           during the past
year.
Onshore Order No. 3 establishes               minimum standards           for site     security
by providing        a system     for production         accountability        and covers        the
use    of    seals,      bypasses      around      meters,         self    inspection,          and
transporter         documentation       requirements,          unauthorized         removal       or
mishandling       of oil and condensate,          facility      diagrams,      recordkeeping
and site     security      plans.

Among the standards           is required        submission           of a site  security     plan
that    includes  a        self-inspection          program           to monitor     production
volumes.

Onshore    Order No. 4 establishes          requirements                and minimum standards
for the measurement         of 0x1 and to provide                     standard    practices     for
lease   oil storage      and handling     facilities.                  Proper  oil measurement
ensures     that   the    Federal     Government      and             Indian   mineral      owners
receive    the royalties       due.

Onshore   Order     No. 5 establishes      minimum    standards     for the proper
measurement      of gas and for the conservation           of natural    resources.
Proper   gas measurement        ensures    that    the Federal     Government       and
Indian   mineral     owners  receive    the royaltles      due.




                                                                                Enclosure     2-3




        Page 78                                                       GAO/RCRD-SO-99
                                                                                   Production Verifkation
                     Appendix VII
                     CommentsProm the Department of
                     the Interior




                                               Respmse to Recammdations
                                  Draft   Report by the -era1  Accounting            Office

                               MINERAL REGLUES: “Shortcanings  in Whore               Federal
                                       Oil and Gas Prcducticn Verificatim?
                                                   (GAOlRCED-90-99)


                                          ailwnR2-       PROEUCXCN ~IFICATICH


                 BTION

                 “Because      basic      checklist      inspections        do not ensure         accurate
                 reporting      of production,        we remmend          that the Secretary       of the
                 Interior     require     the Director       of BIx to determine whether, using
                 available     resources, alternative          inspection      strategies would better
                 identify      significant        under     reporting       of production.         Such a
                 determination          should      explore       using       production   verification
                 inspections      on randanly selected           leases, as wall as CcamideratiapI
                 of whether       probability        sampling      of high production        leasea for
                 inspection      would satisfy        the legislative           reguir-t    for annual
                 inspections.”

                 REsPoNsE

                 BIM agrees with GAO that current Level I inspections             do not include
                 sufficient     requirenwts      for and frequency of witnessing      individual
                 operator      -ur-t            acticms    and production       masure4mnt         and
                 reporting      record    reviews    and ccnparisons      to adequately      assure
                 effective     spot check of production      verification    and deterrence      for
                 misreporting.

See comment 6.   BLM has also determined that probability        sampling of high priority
                 leases would not satisfy      the legislative      requirement    for annual
                 inspections    of leases with significant     production    or those with a
                 history    of noncompliance.

See comment 1.   The actions    BU4 is      taking   to inprove     production     verification       are
                 described   below.

                 Alternative      Insuecticm    Stratesies    Under Consideration

                 BLM has         recently        undertaken    a n-r         of immtant       program
                 improv-t            initiatives       in order    to address both      recent    and
                 r-ring         criticisws        by outside investigations.      Key amcng those
                 initiatives       is an internal        task force review of the Natiawide




                                                                                                  hclosure   2-1




                      Page 76                                                    GAO/RCED-W99 Fmduction Verification
                     Appendix VII
                     ckJmmentsFrom the Department of
                     the Interior




                 As acknowl&xd           in the report,        BI& has evaluated           this inspection
                 type and has concluded               that the resourcee             and inspection          time
                 required      for these inspectims             cannot be justified            for use on a
                 routine       basis,      cmsidering        the minor          royalty       value       of the
                 production      accountability       problem      discovered in BLM's experience.
                 In point of fact, the successful              New Mexico production            verification
                 inspection      cited by GAO as dmmstrating                 the cost benefit           of those
                 inspections      was misleading        because GAO had incanplete             infomtion.
See comment 2
                 'IF&inspection         should not have been includedin                  the randa~~sa~le
                 test by BIN since the prcductim                  accomtability         problem resulting
                 in the large amnmt of royalty                 due had previously           been identified
                 by a Level 1 type inspection.                     BLM strongly        believes        that mxe
                  1eaSeS can          be     inspected        mxe       cost      effectively           and nure
See comment 1    accountability        problem       idmtified        with less intense            procedures
                 than those mloyed             in a WI. WI's           do, hamver,          have a place in
                 BIM's inspectim            program as a follmup                 to resolve          production
                  accountability       problem      in certain      specific      cases.

                 BU4 believes   that producticm can t-z mat cost-effectively             verified
                 for    the greatest     nmber       of leeses     cm a spot-check        basis     by
                 witnessing  a meesur-t,         meter calibration,     or proving action and
                 reviewing    snd carparing          sales   and masur-t           records       with
                 production    reports    for     accuracy    and reasonableness.           BLM is
                 currently   considering      revisions    to its    inspection    strategy       and
                 associated  procedures to incorporate         these el-ts       to be required
                 on a routine end mre freguent basis.

                 Cbmter      4 - AIKVMRO Prwram
                 BU4 agrees with each of the three recamendations               of the report.
                 In general we agree with the findings            of the report,    we disagree
                 with the statement       at the top of page 52 to the effect          that the
See comment 3.   AIRS data is so unreliable          that it cannot be usgi meaningfully       to
                 fulfill    the system's       objectives.      Nmerous   actions    have been
See comment 1,   undertaken    to correct    problm      area identified by the GAO review.

                 It should be noted that the level                 of quality     has significantly
                 inproved      in the AIRS data since the GAO ccnpleted                 its review in
                 July of 1989.          AIRS was inplemented       in Septmber       1986, replacing
                 the USGS MB-1 system.           The MB-1 system had fewer quality           controls,
                 and the data in AIRS that was carried                over from MS-1 has a much
                 lower level        of quality     than data entered since 1987.               The AIRS
                 system was relatively           new--less     then 3 years old--when           the GAO
                 conducted its review.           The systan was still       evolving.       Individual
                 user.5 were still        being trained     and gaining a better        understanding
                 of the use of the systm.                The staff    at all     levels    of the ELM,
                 traditionally        not carputer      oriented,    have continued        to gain a
                 better     understanding      and have increased     its use and dependency on
                 autamted       systars    to inplenent     and monitor the ISE program.


                                                                                                      rnclosure     1-2




                      Page 74                                                       GAO/RCRD.9@99Production Verification
         Appendix VII
         comnlenta From the Department of
         the Intmior




                                                                                                            2

recently     issued minimum industry             standards    for measurement      and site    security
and is also developing             proposed    rulemaking     which would increase        the operator's
role in production          verification,        evaluating     the feasibility      of contract
inspections,       considering         the advisability     of establishing      stricter     penalties
for noncompliance,          and planning        a peer review      validation   ot the inspection
strategy.

       2. Program oversight              by the BLM needs to be strengthened.                   BLM is
implementing       several      corrective         xtions       such as guidance     for,   review    of, and
participation       in field        level     Technical       and Procedural     Keviews,     increased
Washington     Office      starting,        Internal      and Alternative      Internal     Control     Keviews,
ILE training       and position          description        standards     for managers,     a nationwide       16E
workshop,     and field       staffing        level     analysis.

        3. The Automated       Inspection      and Recordation       System (AIRS) database          is
still      ln a validation     stage and IS undergoing           needed improvement.          Recent
initiatives       such as new position         description      and performance      appraisal
standards      for automation      and training        tar involved    staff,   AIRS validation,
monitoring,       quality   assurance      plans,    updates,    and central    directives      on
requirements        and procedures      have been implemented,         or will    be shortly,      since
the initiation         of GAO's study.

     4.    Concerns   regarding      the adequacy of the BLM/MMS/BIA                   Memorandum of
Understanding      in assuring     effective      Interagency     information           exchange will       be
brought    to the Joint     Steering      Committee     for consideration.

Thank you Ior the opportunity            to comment.   The Department     values    your
assistance       in objectively    evaluating   our oil and gas production        accountability
and verification        programs which can only result      in more efficient        and
comprehensive       administration     of the Federal   ana Indian    mineral    estate.

                                                    Sincerely,




Enclosures




          Page 72                                                           GAO/RCED-90.99Production Verification
Appendix VI

Producing Oil and GasLeaseInspctions,
Citations, Assessments,and Civil Penaltiesin
Fiscal Year 1988
                                                                                                               QuarterI!
                                                                                                  AIRS’         reports

                Montana State Office
                Production verification inspecbons                                                    13               72
                Inspections other than PVls”                                                       1,464            1,927
                Total inspections                                                                  1,477           1,999
                Citationsd                                                                         1,257             666
                Assessments and civil penaltfes
                   Amount                                                                         $3.506          $6,250
                   Number issued                                                                      13                    e

                New Mexico State Office
                Production verificatfon mspectfons                                                      0              17
                lnspectfons other than PVls                                                        2,702           3,717
                Total inspections                                                                  2,702           3,734
                Cftations                                                                          1,669            1,746
                Assessments and cavil penalks
                   Amount                                                                         $2.522          2$2.000
                   Number issued                                                                        8                e

                Wyoming State Office
                Production verificatron insoectrons                                                    15                   I
                Inspections other than PVls                                                        2,817                    f
                Total inspections                                                                  2,832                    f
                Citations                                                                             927                   f
                Assessments and civil penaltres
                   Amount                                                                         $9,000                    f
                   Number Issued                                                                       27                   t
                ‘YMa from AIRS data base as of July 1989.

                bData from state offrce summanes of quarterly reports prepared manually by field offices
                ‘Productron verrfication !nspectrons
                %ata relate to all fnspectlons performed, InformatIon IS not avaIlable by type of inspection
                eNot reported.

                ‘Wyoming State Office d!d not require quarterly reports




                Page 70                                                     GAO/RCElMlM9 Production Verification
Producing Oil and Gas LeaseInspections,
Citations, Assessments,and Civil Penaltiesin
Fiscal Year 1986
                                                                                                                         Quarterly
                                                                                                           AIRSa          reports

                Montana State Office
                Production verifrcatron rnspections                                                               0               30
                Inspections other than PVls’                                                                   628             1,462
                Total insDections                                                                             628              1.492
                Citation@                                                                                      178                840
                Assessments and civil penaltres
                Amount                                                                                            0           58,250
                   Number issued                                                                                  0                     e

                New Mexico State Office
                Production verifrcatron inspecttons                                                              1                 84
                Inspections other than PVls                                                                  4,914              8,340
                Total inspections                                                                           4,916              6,424
                Crtations                                                                                    2,956              5,656
                Assessments and civil penaltres
                  Amount                                                                                          0          $12,000
                   Number                                                                                                               e
                         - Issued                                                                                 0

                Wyoming State Office
                Production verifrcatron mspectrons                                                               2                 76
                Inspectrons other than PUS-   ~-                                                             1,433             2,409
                Total inspections                                                                            1,436             2,466
                Citations                                                                                      660              1,597
                Assessments and civrl penaltres
                   Amount                                                                                         0           $8.040
                   Number Issued                                                                                  0                     e

                Qata from AIRS data base as of May 1988
                bData from state offlce wmmarles             of quarterly reports prepared manually by field offices.

                ‘ProductIon     verlflcation   lnspectlons

                %ata relate to all InspectIons performed, InformatIon IS not available by type of inspection

                eNot reported




                Page 68                                                               GAO/FtCJ3D-90.99     Production   Verification
                                                    Appendix III
                                                    Analysis of Citations   Issued by Six BLM
                                                    Field Offices




Table 111.3:Total Specific Violations Cited in AIRS for the Six Field Offices
Reason for citation issuance0                                                 ~-___~                                        Numbed           Percent
Surface requirements
I, Site is not oroDerlv identified                                                                                             1,341                24.8
2. Well equipment is not satisfactory                                                                                            290                 5.4
3. Environmental protection is not satisfactory                                        ~-______       .____                      460                 8.5
4. Temporary or emergency pits are not approved                                                                                  226                 4.2
5. Pits are not satisfactory                                      ~--~~                         --                                56                 1 .o
6. Surface use is not rn accordance with aDDroved Dlan                                                                           109                 2.0
Production                                                                            ~~~~___                        -
7.   Monthly Report of Operations is not completeand accurate                                                                     28                  .5
8.   Monthly Report of Operations [does not] confirm the reasonableness        of:                                                63                 1.2
a.   Production vs. sales
b.   Tank capacrty vs. inventory
c.   Well status vs. actual status
Liquid hydrocarbon production
10. Off-lease measurement is not approved       -___                                                                               5                    .I
12. (Other) method of measuring 011and condensate is not approved                                                                  1                    oc
13. Method of measuring oil and condensate is not approved                                                                        27                   .5
14. Valves are not sealed In accordance with minrmum standards                                                                 1,491                27.6
1.5 Site facility dragram is not satisfactory -                                                                                  210                 3.9
17. Off-lease storage of 011and condensate IS not approved                                                                         0                    0
18. Liquid handling equipment IS not Satrsfactory-                                                   ---
Oil, condensate, natural gas production
20. Comminqlinq
            - - IS not aDDroved                                                                                                      6
Natural gas production
23.   Flaring or venting...is not approved                                                                                         26                   5
25    Off-lease measurement is not approved        ~-                                                                               6                   .i
27.   Method of measurement (other than orrfrce meter) of natural gas IS not approved                                               2                  6c
28.   Method of measuring natural gas IS not satisfactory                                                                          54                IO
29.   Natural gas handling/treatrng equipment is not satisfactory                                                                  31                 6
31.   Collection of kauids is not satrsfactorv    -
Water disposal
33. Water disposal method is not approved                                                                                         36                    7
35. Disposal of water is not satisfactory                                                                                        451                 8.3
                                                                                                              --~~                                     -
Safety (hydrogen sulfide operations)                                                                 .-
37.   Tank batteries are not DroDerlv eauiDDed                                                                                       5                   1
                                                                                                                                              --~
38.   Warning srgns are not properly installed                                                                                       2                   DC
39.   If requrred, the contrngency plan IS not avarlable                                                                             1                   nc
40.   Personnel are not properly protected                                                                                           4                   1
                                                                                                                                          (continued)




                                                     Page 66                                               GAO/RCRD-90-99    Production   VeriPcation
Appendix II
Basic Checklist                    Inspection           Record




   I. 1rm 1Iwolu
            -Il.         IM    1IIlaPL ltwl1ll
            ,n. ituo:u imoi unom
            -IL          IN0   IlltalJi     II lll1l0 rin
                                               Lllu ts

                                                 iIiz&ul              II IN II lnuu1                _
            :s.          IIU   111wlt       IttI1tlctaI

   f. nlMou RLrIn orllmoll
         Il. oil lllul ,m                                             -m
       ,I?. ml ufmnl tlotut1 t&z
            ,I:, lulln     lllll 111tuul tlllnu
            -11. I? llplul.      cGlwloacl tul llIlulu
            -11. tnlmlL       notlctIW llmnmlt




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                   Ill    Ill:                                 m: -m:,                               tlm:-                 nctI(:-                                 m:
     .--.          u     cl 1:                                 uo:~lw:~                              Illnz-             Ill II n: JJ-




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   . . . . . . . . . . . . . ..--.--..--.-.....-.---.       -...e .-..-........---.._..              ___-.......     _. . . . . . ..-.................---.......---...........---.
                                              ltll     on           on mnltlma                                                                   1111 WI II0 lolml                     ml     II
   ~u~~t~ntptta~mutm                                  ~IIKUUL       m tnuu                                                                    aa nt                       OIL           UlKml
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   nip: -                              m: _                1n1: _             ullllt      _                        ml RI:        _
   IIU:                                Ill:,               Im:-               lulu:.                               ntn:.
   1ut: -                              ID:,                ?m.                tllblt~                              lm ml:        _
     tblz-                             @II:-               )otl:-             ?uum        -                        111 ml:       _
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                                                           unolu           lml(I)       ml

   Inlo                  ml:   _          uflo1u    1111: JJ-               1atlu:




 Page 64                                                                                                            GAO/RCED-90.99                         Production                VerifkUiOn
Appendix I
Objectives,   Scope, and Methodology




because it is BLM’S official record system for the inspection and enforce-
ment program, we believe that the data are unreliable (see ch. 4). We
discussed our findings with BLM and MMS officials, obtained official com-
ments from the Department of the Interior, and incorporated those com-
ments where appropriate.




Page 62                                   GAO/RCED-W99   Pmductlon   Veriflcdhm
                                    Appendix I
                                    Objectives, Scope, and Methodology




Table 1.3: Field Offices Reviewed
                                    State oifice          Size                  Field office                                   Leases’
                                    New Mexico            Largest               Farmington Resource Area
                                                                                Farmington East”                                   1,759
                                                                                Farmington Westb                                   1,780
                                                                                                                                   3.539
                                                          Smallest              RIO Puerto Resource Area                             168
                                    Wyoming               Largest               Buffalo Resource Area                                867
                                                          Smallest              Kemmerer Resource Area                               183
                                    Montana               Largest               Great Falls Resource Area                            742
                                                          Smallest              Miles Citv District Office                           425
                                    aAs of July 1988
                                    bFarmlngton Resource Area’s lnspectlon and enforcement program IS dlwded into East and West, with
                                    separate geographlcal areas staffs, procedures, and AIRS data responslbllities.
                                    Source: AIRS.


                                    The district offices responsible for the four resource area offices we
                                    selected in New Mexico and Wyoming coordinate the inspection and
                                    enforcement programs for their respective resource areas. These district
                                    offices are the Albuquerque District Office, New Mexico (for both Farm-
                                    ington Resource Area and Rio Puerto Resource Area); Casper District
                                    Office, Wyoming (for Buffalo Resource Area); and Rock Springs District
                                    Office, Wyoming (for Kemmerer Resource Area). The Lewistown Dis-
                                    trict Office in Montana is responsible for the Great Falls Resource Area,
                                    but the district office has no inspection and enforcement program
                                    responsibilities.

                                    We generally limited our review of program implementation and data to
                                    fiscal years 1986, 1987, and 1988.


                                    To evaluate the adequacy of BLM’S production inspections and manage-
Methodology                         ment controls over program implementation, we interviewed program
                                    headquarters officials in Washington, D.C.; program coordinators in the
                                    three state offices (Montana, New Mexico, and Wyoming); program coor-
                                    dinators at the three district offices that have a coordination role; and
                                    inspectors, supervisors, and managers at the six field offices identified
                                    in table 1.3. We also reviewed pertinent legislation and regulations; pro-
                                    gram strategies issued by BLM headquarters for fiscal years 1986, 1987,
                                    and 1988; any modifications or clarifications to these that were issued
                                    by the three state offices; and other relevant documentation at state and
                                    field offices.



                                    Page 60                                                 GAO~CED.9099       Production   Verittcation
Appendix I

Objectives,Scope,and Methodology


                 In a May 13, 1988, letter, the Chairman, Subcommittee on Mineral
Objectives       Resources Development and Production, Senate Committee on Energy
                 and Natural Resources, asked us to evaluate BLM'S inspection and
                 enforcement program, including whether MH;RMA requirements are being
                 met. In subsequent discussions with the Chairman’s office, we agreed to
                 conduct a management review of the inspection and enforcement pro-
                 gram to determine whether BLM can ensure that production verification
                 is adequate to protect federal, state, and Indian royalty interests. Our
                 review objectives were to

             l   evaluate the adequacy of BLM’S production inspections;
             l   evaluate BLM'S oversight of the program;
             l   present program data on the number of inspections completed and
                 enforcement actions taken, and evaluate the accuracy of and internal
                 controls over BLM'S official data; and
             l   evaluate the cooperation between BLM and MMS in royalty management
                 related to production verification, including whether one agency is
                 better able than the other to verify production.


                 We selected three BLM state offices that accounted for the majority of
Scope            federal and Indian oil and gas production and government revenues-
                 Montana, New Mexico, and Wyoming. The Montana State Office is also
                 responsible for oil and gas leases in North Dakota and South Dakota; the
                 New Mexico State Office is also responsible for oil and gas leases in
                 Kansas, Oklahoma, and Texas; and the Wyoming State Office is also
                 responsible for oil and gas leases in Nebraska.1 As shown in table I. 1,
                 these three state offices accounted for 71 percent of the oil production,
                 85 percent of the gas production, and 77 percent of the royalties from
                 onshore federal and Indian leases in calendar year 1988 (the most recent
                 year for which such data are available).




                 ‘BLM’s inspfxtion and enforcementprogramusesthe term “inspection item,” which generally
                 includes individual leases,as well as communitizationagreementsand units by participating area,
                 which may have morethan onelease.Throughout this report, the term “lease” is usedin placeof
                 inspectionitem.



                 Page58
                      Interior agreed that BLM has exercised insufficient oversight of the
Program Oversight     inspection and enforcement program since 1987. Interior noted that this
                      matter also surfaced in BLM'S 1989 internal review and in the November
                      1989 report by Interior’s Office of the Inspector General. Interior said
                      that BLM has initiated a number of actions to strengthen program
                      oversight.

                      For example, Interior said that BLM is revising the inspection and
                      enforcement program strategy to identify field staffing levels needed to
                      accomplish alternate inspection options. Further, Interior said that BLM
                      will subsequently develop criteria for specific field office staffing and
                      resources. In addition, Interior identified several other corrective actions
                      that BLM has taken or planned:

                      Headquarters staffing has been increased to provide additional guidance
                      and oversight to field offices, including participation in technical and
                      procedural field reviews of the program,
                      Internal control reviews have been scheduled.
                      An inspection and enforcement program course for BLM managers is
                      being developed, and a nationwide workshop for BLM inspection and
                      enforcement program managers and inspectors has been scheduled.
                      Position description standards will be revised to require program exper-
                      tise for field managers as well as supervisory review and
                      documentation.


                      Interior noted that BLM has initiated several improvements in the man-
Automated Program     agement and use of AIRS.For example, Interior noted that position
Data                  descriptions, performance appraisal standards, and training for staff
                      using AIRS are being revised, and central directives on AIRS validation,
                      monitoring, quality assurance, and updates are being developed. Interior
                      also said that new centralized guidance requiring the use of AIRS by field
                      staff will result in improvements in AIRS data and that a new version of
                      AIRS, which will contain additional edits to ensure data accuracy, is
                      scheduled to be implemented in May 1990. We believe that these
                      improvements, if effectively implemented, will respond to our concerns
                      regarding the accuracy of AIRS data.


                      Interior agreed that cooperation and information exchange related to
Cooperation Between   production verification between BLM and MMS needs improvement. Inte-
BLM and MMS           rior said that an evaluation of the interagency Memorandum of Under-
                      standing would be considered and that needed changes would be made.


                      Page56                                     GAO/RCED90-SSProductionVerification
                  chapter 5
                  MoreCooperationBetweenBLMand
                  MMSNeeded




                  representatives expressed concern about cooperation with MMS, MMs rep-
                  resentatives did not believe that these concerns were valid. While coop-
                  eration might be further enhanced by transferring the inspection and
                  enforcement program to MMs, there are likely to be disadvantages to
                  such a move, and more importantly, the move would not correct the
                  problems discussed in this report. BLM and MMS could consider ways to
                  improve cooperation under the current framework.


                  We recommend that the Secretary of the Interior require the Directors of
Recommendations   BLM and MMS to jointly evaluate whether the current Memorandum of
                  Understanding adequately addresses BLM'S concerns regarding timeli-
                  ness and law enforcement.




                  Page64                                   GAO/BCELWW99Pmduction Verification
                         Chapter 6
                         More Cooperation Between BLM and
                         MMS Needed




                         requested for use in criminal investigations. However, if MMS staff iden-
                         tify possible criminal activity through their audits, the chief of MMS'
                         Royalty Compliance Division said he has requested them to notify him,
                         and he in turn refers the cases to Interior’s Office of the Inspector Gen-
                         eral. He said that the Inspector General’s office has asserted that it has
                         jurisdiction over suspected fraud in production reporting. While the
                          chief worked directly with BLM law enforcement agents in the past, he
                          stopped doing so when the Inspector Generals office asserted its current
                          position. Therefore, he believes that BLM'S primary dispute is with the
                          Inspector General’s office rather than with MMS.


                         Deciding to transfer a program from one agency to another requires a
Neither Agency Is        detailed examination of the costs and benefits involved, which our
Clearly Better Able to   review did not do. There are certain merits to leaving the inspection and
Fulfill Inspection and   enforcement program in BLM. On the other hand, there could be benefits
                         to transferring the program to MMS-at a cost. To ensure that production
Enforcement Program      is reported accurately for royalty determination purposes, Interior must
Responsibilities         do both on-site inspections-to     guard against physical causes for under-
                         reporting-and      post-production audits-to match production documen-
                         tation with production reports. We believe that neither agency is clearly
                         in a better position to fulfill responsibilities of the inspection and
                         enforcement program. More importantly, we believe that transfer of the
                         program alone would not be sufficient to correct problems identified in
                         this report.


Strengths of BLM         When BLM conducts production inspections, it does more than just
                         review production documentation. Such inspections also include on-site
                         observations of operations, which may reveal physical causes-such as
                         unsealed valves-of underreported production and susceptibility to
                         theft. In addition, production inspections are only one aspect of BLM'S
                         inspection program; inspectors also inspect drilling and abandonment
                         operations, and they inspect for surface, environmental, and safety
                         issues, which are not related to production and so do not affect royal-
                         ties. If responsibility for production-related inspections is transferred to
                         MMS, MMS would have to expand its normal role to include on-site inspec-
                         tions, requiring additional technical expertise. Furthermore, either BLM
                         would still need inspectors for non-production-related inspections, or
                         MMS would have to also assume responsibility for those inspections,
                         which are unrelated to MMS' mission,




                          Page 52                                   GAO/RCED-90.99Production Verification
More CooperationBetween BLM and
MMS Needed

                          To better ensure that the government receive accurate royalty pay-
                          ments, BLM and MMS have improved cooperation between their respective
                          programs-inspection      and enforcement and royalty management. Spe-
                          cifically, BLM and MMS have a Memorandum of Understanding that
                          defines certain responsibilities for each agency. However, some BLM
                          state and field office staff identified problems in obtaining information
                          from MMS.

                          While cooperation between the inspection and enforcement program and
                          the royalty management program might be enhanced by moving the
                          inspection and enforcement program to MMS, this move would be likely
                          to have certain disadvantages and costs. Alone, such a move would not
                          be able to correct the problems identified in this report.


                          BLM and MMS developed and now cooperate under a Memorandum of
Cooperation Between       Understanding to define responsibilities for managing onshore oil and
BLM and MMS               gas leases. Some BLM representatives, however, expressed concerns
                          about the timeliness of information MMS has provided and about MMS’
                          cooperation in law enforcement investigations.


Lack of Cooperation Was   Our 1981 report on oil and gas royalty collections, when both inspec-
Identified Earlier        tions and royalty accounting were done by the Geological Survey, identi-
                          fied the need for field inspection staff to assist accounting personnel in
                          verifying reported data and noted that this cooperation rarely occurred.’
                          In addition, the Linowes Commission reported in 1982 that there was no
                          routine system for making federal accountants aware of inspection
                          results, and that accountants did not flag anomalies that signal the need
                          for inspections.


Memorandum of             Addressing these concerns, BLM and MMS signed a Memorandum of
Understanding             Understanding in January 1984. Its purposes were to create a smooth
                          functional relationship between the two agencies, assign responsibility
                          for specific onshore lease management activities, and identify required
                          information exchanges. The Memorandum was revised in February 1987
                          and again in December 1988 and covers several areas of interaction
                          between the two agencies, including inspections.


                          ‘Oil and GasRoyalty Collections-langstanding ProblemsCostingMillions (AFMD82-6, Oct.29,
                          1981).



                          Page60                                            GAO/RCEDS@49Production Verification
              Chapter 4
              Automated Official Program Data
              Are Unreliable




              when an inspection is closed, thereby causing “empty” inspection
              records.

              Service Center representatives told us that AIRSedits were developed by
              a requirements committee, with participation by users, and they believe
              that the edits are adequate. They stated that data that need to be consis-
              tent throughout BLM (such as lease identification numbers) are edited,
              whereas data that are used by individual offices are not edited. They
              also stated that additional edits would so restrict the system that it
              would become unusable. However, they noted that a July 1989 AIRS
              modification does edit the opening and closing dates to require that the
              month be a number between 1 and 12, and the day be a number between
               1 and 31. Although this is an improvement, incorrect dates, such as Feb-
              ruary 30, can still be entered, and records can still be closed with dates
              preceding opening dates.

              Although we were able to determine the number of “empty” checklist
              inspection records in AIRS by writing our own computer program to iden-
              tify records that had closing dates but no inspection results, a December
               1988 AIRSmodification may make identification of “empty” records vir-
              tually impossible in the future. Field offices may now choose to carry
              forward inspection results from previous inspections when new inspec-
              tion records are opened. If a field office uses this option, the newly
              opened inspection record will show inspection results and therefore will
              look like a completed inspection. There is no way to identify such
              records if they are subsequently closed without inspections having been
              done. A Service Center official stated that this modification was made at
              the request of field offices and is meant to reduce the burden of entering
               data by allowing only changes to inspection records to be entered, rather
               than the complete results of new inspections.


               BLM'S official inspection and enforcement program data are unreliable.
Conclusions    As a result, BLM cannot ensure that leases are assigned correct priorities
               to comply with KXRMA requirements, whether reported inspections have
               in fact been done, or whether inspection results are recorded correctly.
               BLM also cannot tell the extent to which various enforcement actions are
               used. Without accurate data, BLM cannot ensure that its program com-
               plies with FOGRMA or its current strategy, nor does BLM have accurate
               and complete data to monitor and evaluate the program.




               Page 48                                   GAO/RCED90-99Production Verification
Chapter 4
Automated Of’flcial Pmgram Data
Am Unreliable




AIRSdoes not contain information on enforcement actions that occur
outside BLM, such as court judgments.

BLM state and field office representativesgenerally told us they do not
believe that AIRSenforcement data are complete (see app. III for AIRS
data). Consequently, they place more reliance on enforcement data in
their manual quarterly reports. Furthermore, our comparison of
enforcement data recorded in AIRSwith data in yearend summaries of
the quarterly reports shows substantial differences. The quarterly
report usually contained higher numbers than AIRS(see apps. IV, V, and
VI).

In addition, in the BLM field offices we visited, data on oral warnings and
written orders were not recorded in AIRS.BLM field officials told us that
this is because oral warnings and written orders do not count against
operators’ compliance histories. Inspectors told us that they use such
enforcement actions to get lease operators to correct certain minor
problems. However, the extent to which oral warnings and written
orders are used cannot be determined from AIRS.

Also, enforcement actions that occur outside BLM, such as court judg-
ments, are not recorded in AUS because AIRSwas not designed to track
such actions. For example, although Montana state office representa-
tives have not sought criminal penalties under FOGRMA, they told us they
are aware of some operators being convicted in federal courts, but those
convictions are not recorded in AIRS.

In its formal comments on a draft of this report, Interior said that it
would not be appropriate to record these actions in AIRSbecause they
are inconsistent with the use of AIRS.Subsequently, BLM'S Chief, Compli-
ance and Operations Branch, clarified Interior’s comments. He said that
BLM should not be expected to track actions against operators that do
not involve federal or Indian leases and that those actions should not
count against operators’ compliance histories. He also told us that
external actions involving federal or Indian leases are rare and that BLM
handles such situations with direct instructions to appropriate field
offices to increase the number of inspections on affected leases. We
agree that BLM should not be expected to track actions against operators
that do not involve federal or Indian leases. However, we believe that
any enforcement actions involving federal or Indian leases should be
part of operators’ compliance histories. Therefore, all enforcement
actions involving federal or Indian leases should be recorded in AIRS,
BLM’S official data base for the inspection and enforcement program.



Page46                                       GAO,‘RCEDgog9   Production   Veticatlon
                                  chapter 4
                                  Automated Official      F~~gram   Data
                                  Are Unreliable




Table 4.4: Recorded and “Empty”
Inspections in Fiscal Year 1988   Field office                             Inspections         “Empty”           Percent
                                  Farmington
                                    Farmington East                                   627            12                   2
                                    Farmington West                                    a5            30                  3.5
                                                                                      712            42                   6
                                  Buffalo                                             569            24                   4
                                                                             ---~-
                                  Great Fails                                         452             2                   08
                                  Kemmerer                                            157             0                   0
                                  Miles City                                          378             4                    1
                                  Rio Puerto                                           71              0                 3
                                  Total                                              2,339            72                     3

                                  “Less than 1 percent.
                                  Source. AIRS, Feb 1989

                                  In addition to the 42 inspections identified above as not completed in
                                  1988, Farmington has even larger numbers of “empty” checklist inspec-
                                  tions for fiscal years 1987 and 1986. We found that 669 (29 percent) of
                                  Farmington’s 2,330 inspections reported as completed in 1987 and 508
                                  (15 percent) of the 3,475 inspections reported as completed in 1986 were
                                  not done. These “empty” inspections were caused by closing inspection
                                  records for inspections not performed by using the reported prior
                                  inspection completion date. According to the AIRS user representative,
                                  these records should be deleted from AIRS, rather than closed. As a result
                                  of Farmington’s practice, the number of completed inspections reported
                                  in AIRS for prior years is overstated.

                                   Farmington also closed 1,420 “empty” inspection records by using ficti-
                                   tious dates of 1981 or 1966, thereby making these records readily identi-
                                   fiable as not having been completed because those dates preceded AIRS'
                                   implementation in 1986. These “empty” checklist inspection records do
                                   not affect the number of inspections reported as completed since 1986.
                                   However, they should also have been deleted from AIRS,rather than
                                   closed.

                                   Comparing AIRS data with year-end quarterly reports, which are no
                                   longer required by IH,M headquarters, we found substantial differences
                                   in the numbers of reported inspections over the past 3 years (see apps.
                                   IV, V, and VI). These reporting discrepancies have not been reconciled
                                   by BLM,although some state and field offices are trying to improve the
                                   quality of their AIRS data.




                                   Page 44                                     GAO/RClZLNKW9     Production   Verification
                                           Chapter 4
                                           Automated Official Program Data
                                           Are Unreliable




                                           worked informally with lease operators to get problems corrected,
                                           rather than issuing citations.


Inaccurately Reported                      Although AIRS data showed that most of the field offices we reviewed
Inspections                                inspected their high-priority leases and at least one-third of their low
                                           priority leases in fiscal year 1988, some of these inspections were not
                                           done.

Reported Inspections of High-              As table 4.2 shows, fiscal year 1988 AIRSdata indicate that the 6 field
Priority Leases                            offices inspected 434 (92 percent) of the 474 leases identified in AIRSas
                                           high priority. However, AIRS data indicate that Great Falls and Farm-
                                           ington West did not inspect 25 percent and 31 percent, respectively, of
                                           their high-priority leases. The Great Falls supervisor told us that his
                                           office overlooked inspecting four leases, but that three had been incor-
                                           rectly designated as high-priority leases. He said that he started a pro-
                                           duction verification inspection on the remaining lease in September 1988
                                           but did not complete it until November 1988, so this inspection was not
                                           reported until fiscal year 1989. The Farmington West supervisor said
                                           that his inspectors were assigned to other inspection and enforcement
                                           activities.

Table 4.2: Reported Inspections of High-
Priority Leases in Fiscal Year 1988        Field office                             Leases       Inspections       Percent
                                           iarmington
                                           ~~__
                                              Farmington East                           186               187            99
                                              FarmIngton West                           108                75            69
                                                                                        296               262            89
                                           Buffalo                                       92                92           100
                                           Great Falls                                   20                15            75
                                           Kemmerer                                      34                33            97
                                           Miles City                                    18                18            .~
                                                                                                                        100
                                           RIO Puerto                                    14               14            100
                                           Total                                        474              434             92
                                           Source AIRS, Feb 1989

                                           According to AIRS production and compliance data, 127 of the 434 high-
                                           priority leases reported as inspected and 24 of the 40 high-priority
                                           leases reported as not inspected were assigned high priority but should
                                           have been assigned low priority.




                                           Page 42                                    GAO/‘RCED90-99Production Verification
Chapter 4

Automated Official Program Data
Are Unreliable

                             BLM'S official data for the inspection and enforcement program are not
                             reliable. We identified several types of errors in the data contained in
                             AIRS,such as leases whose inspection priorities did not correspond with
                             production and compliance data, inspections recorded as completed
                             although they were not done, and inspection results incorrectly
                             recorded. As a result, BLM cannot ensure that high-priority leases are
                             correctly identified and inspected at least annually, as required by
                             FOGRMA, or that the remaining leases are inspected every 3 years, as
                             required by BLM'S current program strategy.

                             Furthermore, because data on enforcement actions are incomplete,
                             neither we nor BLM can accurately determine the extent to which various
                             enforcement actions were used. Data on BLM'S enforcement actions were
                             not always entered into AIRS, nor were enforcement actions that occur
                             outside BLM, such as court judgments.

                             These data problems are due in part to the lack of central guidance for
                             entering data into AIRS. In addition, AIRS lacks necessary internal con-
                             trols that could prevent some data inaccuracies.


                             AIRS, BLM'S official automated data system for the inspection and
Inspection Data Are          enforcement program, is intended to help BLM manage the program by
Unreliable                   (1) reducing inspectors’ reliance on manual files; (2) ensuring that legis-
                             lative requirements are met; and (3) providing needed management
                             information. Data recorded in AIRS include inspection priorities, inspec-
                             tions completed, and inspection results. However, we found many inac-
                             curacies in AIRS inspection data. We believe that because AIRSofficial
                             inspection and enforcement program data are unreliable, they are of
                             limited use in managing the program.


Inspection Priorities That   AIRS should identify    leases that meet BLM'S criteria for being designated
Do Not Agree With            high priority-requiring      at least annual inspection under FOGRMA. Data
                             that must be recorded in AIRS to accomplish this task include reported
Production and               production and compliance history-that         is, numbers and types of cita-
Compliance Data              tions issued. However, in AIRS we found leases whose inspection priori-
                             ties did not correspond with production and compliance data.

                             As shown in table 4.1, the 6 field offices we visited identified 474 leases
                             as high priority for inspection in fiscal year 1988-about 8 percent of
                             their total inventory of 5,990 leases. These offices ranked 5,244 leases
                             (88 percent) as low priority and did not rank the remaining 272 leases (4


                             page40                                      GAO/BCED-9099ProductionVelification
                  Chapter3
                  Inspection Program ovehght Is Inad~u.¶~




                  implementation of regulations, or accurate reporting of oil and gas pro-
                  duced from public lands. BLM'S planned corrective actions for identified
                  control weaknesses were almost the same for both 1986 and 1987: to
                  implement a program for (1) inspecting oil transporters; (2) reviewing
                  the uniformity of application of oil and gas regulations; and (3) using
                  cooperative agreements with Indian tribal organizations, the Bureau of
                  Indian Affairs, and states. In 1987, BLM added a fourth planned action:
                  ensuring a uniform level of competence for inspectors.

                  While BLM has taken some of these actions, it has not fully addressed the
                  reported program weaknesses or taken the actions in a timely manner.
                  Specifically, (1) BLM did not issue instructions for inspecting oil trans-
                  porters until February 1988; (2) field offices are not uniformly inter-
                  preting, enforcing, or implementing oil and gas regulations; (3) few
                  inspection program cooperative agreements with Indian tribal organiza-
                  tions have been implemented; and (4) BLM has not uniformly imple-
                  mented its certification program. In addition, in October 1989, the Office
                  of Management and Budget designated BLM’S inspection and enforcement
                  program as a high-risk area within Interior’s responsibility for ensuring
                  accurate collection of oil and gas royalties.


                  When BLhI decentralized program oversight and evaluation responsibili-
Conclusions       ties to state offices in 1987, it did not ensure that state offices consist-
                  ently implemented their responsibilities. As a result, field offices have
                  implemented their programs differently. Because field office supervision
                  is often informal and not documented, BLM does not know whether the
                  extent of supervision is appropriate or whether individual inspectors
                  are applying program requirements correctly and consistently.

                   In addition, with decentralization, BLM discontinued headquarters pro-
                   gram evaluations. Since then, state office program coordinators have not
                   all formally evaluated their field offices. Without adequate program
                   oversight and evaluation, BLM cannot ensure that program implementa-
                   tion complies with its inspection and enforcement program strategy.


                   To ensure that BLM'S inspection and enforcement program is consistently
Recommendations    implemented, we recommend that the Secretary of the Interior require
                   the Director of BLM to strengthen program oversight, including the fol-
                   lowing specific actions:




                   Page33
                         Chapter 3
                         Inspection Program Oversight Is Inadequate




                         inspectors. The quality assistance reviews were conducted by teams
                         comprised of headquarters and state office staff. Reviews identified
                         gaps between policy and field office procedures. Field offices were
                         required to respond to the headquarters inspection and enforcement
                         office and to implement or otherwise address any recommendations.

                         When the headquarters inspection and enforcement office was dis-
                         banded in January 1987, headquarters’ responsibility for general pro-
                         gram evaluation was transferred to the Program Evaluation Division,
                         which is responsible for conducting general evaluations of all BLM pro-
                         grams. Centralized quality assistance reviews were discontinued.

                         Since then, the Program Evaluation Division has not conducted a com-
                         plete evaluation of the inspection and enforcement program, other than
                         the 1989 preliminary study of the program. The study reported major
                         inconsistencies in states’ program implementation and oversight as well
                         as lack of headquarters oversight. However, the study concluded that
                         state offices should be allowed time to review their own programs first,
                         and that these state evaluations should in turn be evaluated by the
                         headquarters division responsible for fluid minerals.


State Offices Have Not   When the headquarters inspection and enforcement office was dis-
                         banded in 1987, responsibility for in-depth program evaluation-for-
Consistently Evaluated   merly accomplished through centralized quality assistance reviews-
Their Field Offices      was delegated to state offices. We found that state offices have not con-
                         sistently reviewed their field offices. The Montana state office program
                         coordinator said he generally reviewed each of the three field offices
                         twice a year but reviewed two of the field offices only once in fiscal year
                         1988. The New Mexico state office program coordinator said he gener-
                         ally reviewed each of the seven field offices every 3 years but did not
                         conduct any reviews in fiscal year 1988 because of limited travel funds.
                         The Wyoming state office program coordinator said he had not con-
                         ducted formal evaluations of any of the nine field offices through fiscal
                         year 1988 because of other program priorities, but that he informally
                         reviewed field office programs without documenting such reviews.
                         According to the state coordinators, evaluations in both New Mexico and
                         Montana were similar to the former headquarters quality assistance
                         reviews, in that they assessed whether field offices were complying
                         with the program strategy.

                          In addition, the preliminary study conducted by the headquarters Pro-
                          gram Evaluation Division reported that the scope, timing, purpose, and


                          Page 36                                     GAO/RCED9099 Production Verification
                          Chapter 3
                          Inspection Promu~ Oversight Is Inadequate




                          violations or unclear federal standards. The Montana and Wyoming
                          state office program coordinators said that they discouraged the use of
                          oral warnings unless inspectors documented such warnings with written
                          citations. In contrast, the New Mexico State Office specifically author-
                          ized oral warnings in a July 1988 memorandum, stating that their use
                          should be noted in inspection records. In the Farmington, New Mexico,
                          office one program supervisor encouraged oral warnings, while the
                          other supervisor discouraged their use and preferred that his inspectors
                          rely on written citations. Inspectors in all six field offices said they
                          issued oral warnings, but only the Miles City, Montana, inspectors said
                          they usually documented the warnings with subsequent citations or
                          inspection record notes.

                          Field office use of written orders also varied. Some offices used them,
                          but inspectors in other offices said they issued citations for the same
                          types of problems. For example, Buffalo, Wyoming, inspectors said they
                          issued written orders when operators filed incorrect site diagrams. Then
                          if the operators failed to submit correct diagrams, they issued citations.
                          However, the Farmington West, New Mexico, supervisor said that his
                          inspectors issued citations for both situations.

                          Field offices also varied in their use of stronger enforcement actions,
                          including the relative number of citations issued. The average number of
                          citations per inspector issued in fiscal year 1988 ranged from a low of 1
                          in Rio Puerto to a high of 111 in Miles City. In addition, the Program
                          Evaluation Division’s preliminary study noted a lack of uniformity in
                          the use of enforcement actions among field offices. For example, the
                          study noted that a lease operator was shut down by one BLM field office
                          for noncompliance but allowed to continue lease operations elsewhere
                          by another field office in spite of the same identified deficiencies.


Certification   Program   Field offices varied in how they implemented the technical review
Varies                    requirement of the national certification program. The program, as
                          announced in December 1986, was intended to create a consistent level
                          of expertise among inspectors.

                          Of the 24 inspectors and 7 supervisors in the 6 field offices we reviewed,
                          22 inspectors and 6 supervisors were certified. Two inspectors in Farm-
                          ington, New Mexico, were hired in 1987 and had not yet completed their
                          formal training because of budget restrictions, and the Rio Puerto, New
                          Mexico, supervisor was a minerals manager who did not intend to
                          become a certified inspector. Most inspection and enforcement staff in


                           Page 34                                    GAO/RCED-9099Production Veritication
Staff Levels Vary   BLM has substantially  improved program staff levels since inadequate
                    program staff levels were identified by us in 1981’ and the Linowes
                    Commission in 1982, when the inspection and enforcement program was
                    managed by the Geological Survey. In 1981, we reported that there were
                    47 federal inspectors reviewing activities at over 44,000 producing wells
                    (an average of about 940 wells per inspector) and found that this ratio
                    was not enough to provide adequate coverage. In 1982, the Linowes
                    Commission reported that there were 63 federal inspectors for 17,500
                    leases (an average of about 280 leases per inspector) and recommended
                    an increase to at least 83 full-time inspectors, resulting in an average of
                    about 210 leases per inspector. In 1988, BLM reported that 117 program
                    inspectors nationwide were responsible for 19,700 producing leases and
                    82,100 wells. The total number of inspectors has increased 150 percent
                    since 1979, the average number of wells per inspector has decreased 25
                    percent from 940 to 700, and the average number of leases per inspector
                    has decreased 40 percent from 280 to 170.

                    However, these staff levels are not evenly distributed among field
                    offices, resulting in wide variances in average numbers of leases, wells,
                    and completed inspections per inspector, as shown in table 3.1.
                    Although these averages are not the only factor to consider when com-
                    paring the offices (other comparisons could address factors such as
                    types of inspections, complexity of leases, and travel time between
                    leases), they demonstrate variation in relative staff levels and work
                    loads.




                    ‘Oil-Lmgstmdiig                     Problem CostingMillions, (AFMIXW6, Oct.29,
                    1981).



                    Page 32                                   GAO/RCED9099 Production Verification
                                              Chapter 3
                                              Inspection Program Oversight Is Inadequate




                                              supervision was informal and not documented, there is limited evidence
                                              of the extent of supervision provided.

Responsibilities   and Expectations           The responsibilities of inspection and enforcement program supervisors
                                              varied among field offices. Supervisors in two field offices (Kemmerer,
                                              Wyoming, and Rio Puerto, New Mexico) were managers who also had
                                              responsibilities for other minerals programs. They estimated that they
                                              spent 50 percent or less of their time on the inspection and enforcement
                                              program. Supervisors in the other four field offices were inspectors
                                              responsible solely for inspection and enforcement program activities. In
                                              three offices (Buffalo, Wyoming, and Great Falls and Miles City, Mon-
                                              tana) they were required to conduct inspections and supervise inspec-
                                              tors. In the Farmington, New Mexico, office they only supervised
                                              inspectors.

                                              Performance expectations for supervisors also varied. For example, Buf-
                                              falo’s supervisory expectations included the following detailed
                                              statements:

                                      l       Do quality control follow-up inspections on 5 percent of all field inspec-
                                              tions done by the inspectors being supervised.
                                      l       Supervise three inspectors; ensure accurate records and field documen-
                                              tation are kept. Spot-check at least 10 percent of all citations issued for
                                              completeness, accuracy, and appropriateness. The overturning of no
                                              more than six appeals by state directors will be considered fully suc-
                                              cessful performance.

                                              In contrast, the Farmington East supervisor had less detailed supervi-
                                              sory expectations:

                                      . Exercise managerial leadership through direct and indirect supervision
                                        of inspectors within realm of assigned areas of responsibilities. The
                                        standard is met if working relationships are maintained within the
                                        resource area. Work assignments are clearly managed and employees
                                        utilized effectively to complete assigned tasks; employees are guided,
                                        directed, and counseled.
                                        Ensure that communication and teamwork are continually being
                                          l


                                        improved. The standard is met by maintaining open communication and
                                        coordination with program and other staff.

Extent of Supervision                         The Linowes Commission reported in 1982 that supervision of inspec-
                                              tors was haphazard, and we could not determine if this situation has
                                              changed. We found that. supervisors generally relied on informal,


                                              Page 30                                      GAO/RCED4W3 Production Verifieaton
                                chapter3
                                IIlspectIon Program ovemight Is Ilmdequati




                            . Enhance consistency in program activities by completing and issuing
                              regulations and the Onshore Oil and Gas Orders and by maintaining
                              stable guidelines.
                            . Ensure consistency in enforcement actions.
                            . Develop and implement a formal certification program for inspectors,
                              including specific and comprehensive training and development, to
                              ensure a minimum level of technical and regulatory competence.
                            . Restructure the centralized quality assistance reviews, formerly con-
                              ducted by the headquarters inspection and enforcement office to mon-
                              itor field office implementation of the program, so that management
                              evaluations are conducted by the headquarters program evaluation divi-
                              sion and in-depth evaluations are conducted by state offices.

                                The task force report was signed by the Director of BLM in December
                                1986 and distributed to state offices in 1987. However, some state
                                offices did not implement any of the task force recommendations
                                because they were uncertain about whether the Director’s concurrence
                                was a directive to proceed with changes. In May 1988, BLM clarified the
                                confusion and formally implemented the report’s recommendations in a
                                memorandum from the Director of BLM to the state office directors.


Headquarters Oversight of       In response to the task force recommendations, the headquarters inspec-
the Inspection and              tion and enforcement office was disbanded in January 1987. The May
                                1988 memorandum stated that although this office had been created in
Enforcement Program             response to the considerable amount of attention given the program by
                                the Congress and the public, the program had matured to the point
                                where it no longer required that level of visibility in BLM. As a result,
                                responsibility for general program evaluation was transferred to the
                                Program Evaluation Division, and the headquarters inspection and
                                enforcement role became one of policy-level coordination and guidance.

                                Since that time there has not been a headquarters BLM manager directly
                                in charge of the inspection and enforcement program. When the inspec-
                                tion and enforcement office was disbanded, its staff was merged into
                                another BLM division but continued to provide technical, procedural, and
                                policy advice to state offices, including comments on state office annual
                                inspection plans. Because program authority had been delegated to state
                                offices, no BLM headquarters official had the authority to direct the state
                                offices to run their programs differently.

                                A preliminary study of the inspection and enforcement program was
                                conducted by BLM'S Program Evaluation Division in the spring of 1989.


                                Page28                                       GAO/'RCED-9@99
                                                                                          Production VerIf¶cation
Chapter 2
Limited Pruduction Verifkation Does Not
Ensure Accurate Computation of Royalties




priority leases annually, as required by FOGRMA, Interior should ask the
Congress to amend FOGRMA accordingly.




Page 26                                    GAO/RCRD-96.99Prcduction Verification
Chapter 2
Limited Production Verification DoesNot
Ensure Accurate Computation of Royalties




cost-effective because they had not generally identified significant pro-
duction underreporting. Under BLhIk current strategy, production verifi-
cation inspections are generally conducted only if problems identified in
checklist inspections are unresolved. The current strategy allows field
offices to randomly select up to 1 percent of their total leases for pro-
duction verification inspections, but it says that these should not inter-
fere with completing required checklist inspections and production
verification inspections initiated as a result of identified problems.

BLM'S chief of the division responsible for fluid minerals told us that the
inspection strategy was developed to fit available program resources, so
that the FOGRMA requirement to inspect high-priority leases at least
annually could be met-“making       the foot fit the shoe.” For example, he
stated that the oil and gas production figures initially used to define sig-
nificant production under FOGRMAwould have required about 150
inspectors to annually inspect all leases meeting this definition. How-
ever, because the state offices planned to have only about 117 inspec-
tors, he said that the definition was changed so that it would result in
the number of leases that 117 inspectors could inspect annually.

RLMhas similarly decided what type of inspections to perform. BLM uses
checklist inspections instead of production verification inspections
largely to fit the number of inspections to the availability of inspectors
and to ensure that high-priority leases are inspected annually.
According to a BLM headquarters official who helped develop the current
strategy, BLM did not. think that it had enough inspectors to conduct
annual production verification inspections on all high-priority leases
because such inspections are so time-consuming. Instead, BLM decided to
use checklist inspections to meet the FDGRMA requirement for at least
annual inspections of high priority leases.

BLM'S decision to rely on checklist inspections was also based in part on a
BLM test conducted during fiscal year 1986. State offices were directed to
conduct production verification inspections on at least 15 percent of the
leases assigned a high priority under the production criterion. Eight
state offices conducted 109 production verification inspections in this
test, at an estimated cost to BLM of about $107,000. Only one inspection
resulted in significant additional royalty revenues-about    $625,000.
Because only one inspection resulted in significant recovery of revenues,
BLh4 concluded that random production verification inspections were not
cost-effective and should be used only when indicated by checklist
inspections.



Page 24                                    GAO/RCED-90.99Production Verifiication
Limited Production Verification DoesNot
Ehsure Accurate Computation of Royalties

                       KGRMA   requires Interior to establish a comprehensive system to accu-
                       rately determine oil and gas royalties. A key component of such a
                       system is the verification of production. However, BLM’s inspection and
                       enforcement program verifies production on only a small number of
                       leases. The extent of BLM’S production verification is inadequate to sat-
                       isfy the FDGRMA requirement that Interior be able to accurately deter-
                       mine royalties.


                       In 1982 the Linowes Commission reported that the absence of produc-
Allegations of Theft   tion verification was a fundamental defect in the onshore oil and gas
and Production         inspection program, which at that time was administered by the Geolog-
Underreporting         ical Survey. The Commission noted that companies were on an honor
                       system because the inspection program did not verify operators’ reports
Continue               of oil and gas production and sales. Several witnesses before the Com-
                       mission suggested that the aggregate underpayment of royalties could
                       run into the hundreds of millions of dollars, and the Commission heard
                       testimony alleging that extensive theft and fraud had occurred.

                       The Commission  believed  that inspectors should independently  verify
                       production by comparing (1) operator data with inspection observations
                       and source data and (2) sales reports with production reports. The Com-
                       mission   report   noted   that

                       inspectors must not only determine that openings to tanks are locked or sealed; that
                       there is no unauthorized    piping that bypasses meters; that waste pits are not filled
                       with oil in ways that invite theft. They must also check wells actually producing on
                       the lease, to see that they match the number reported in the operators’ [sic] monthly
                       production report; and they must check meters to see that they accurately measure
                       the oil and gas flowing through them.

                       While BLM has improved the inspection and enforcement program since
                       assuming responsibility for it, allegations of oil and gas theft continue.
                       For example, in May 1989, testimony before the Special Committee on
                       Investigations, Senate Select Committee on Indian Affairs, indicated that
                       theft is occurring from some oil and gas leases on Indian lands.

                       In an October 1989 letter to Interior, the Office of Management and
                       Budget identified BLM’S onshore inspection   program  as a high-risk area
                       associated with Interior’s responsibility for ensuring the accurate collec-
                       tion of revenues. The letter cited an inadequate number of inspectors
                       and an incomplete central information system for the decentralized
                       program.



                       Page 22                                           GAO/RCED-9099Production Verification
Chapter1
llltl%3dUCtiOll




whether one agency is better able than the other to fulfill production
verification responsibilities.

Our review addressed production inspections. Because the Secretary of
the Interior has assigned responsibility for production verification to
BLM, we limited our review to BLM'S inspection and enforcement pro-
gram. We did not specifically address oil and gas theft occurring from
federal or Indian leases, the effectiveness of the inspection and enforce-
ment program in identifying or preventing theft, or the role of law
enforcement in the inspection and enforcement program. Because we
found that BLM was doing little to verify production volume, we did not
extend our review to address how effectively BLM was verifying the
reported oil and gas quality.

Our review included three BLM state offices covering nine states: Mon-
tana (responsible for oil and gas leases in Montana, North Dakota, and
South Dakota), New Mexico (responsible for Kansas, New Mexico,
Oklahoma, and Texas), and Wyoming (responsible for Nebraska and
Wyoming). These three state offices accounted for 71 percent of federal
and Indian onshore oil production and 85 percent of federal and Indian
onshore gas production. For each state office, we reviewed its field
office responsible for inspecting the most leases and its field office
responsible for inspecting the fewest leases, in order to determine if pro-
gram implementation varied among offices because of size. The Farm-
ington, New Mexico, resource area office’s inspection and enforcement
program is divided into two operations, designated East and West, each
having its own inspectors, supervisors, procedures, and data. We met
with BLM inspection and enforcement staff in Washington, D.C., at the
three state offices, and at the six field offices. We reviewed relevant leg-
islation, regulations, policies, and guidance. We also met with BLM'S AIRS
user representative and conducted various tests of AIRS data at BLM'S
Denver Service Center. Finally, we met with MMS staff to discuss coordi-
nation and reviewed the BLM-MMS Memorandum of Understanding.
Appendix I provides more details on our objectives, scope, and
methodology.

We conducted our review from May 1988 through July 1989 in accor-
dance with generally accepted government auditing standards. How-
ever, although we use AIRS data because they are BLM'S official data for
the inspection and enforcement program, we do not believe they are reli-
able, and BLM officials agreed. Because BLM officials believe that manu-
ally prepared state office summaries of field office quarterly reports are



 Page    20
                        Chapter1
                        Introduction




                        may result in one-time assessments of $250 per violation, up to a max-
                        imum of $500 per operator per lease.

                        If an operator does not correct a violation within 20 days of an assess-
                        ment, or longer if specified by BLM, a civil penalty of up to $500 per day
                        per violation may be levied by BLM. If the violation is not corrected
                        within 40 days of the civil penalty, the penalty may be increased to up
                        to $5,000 per day per violation, up to a maximum of 60 days. If an oper-
                        ator does not correct a violation following the civil penalty period, the
                        regulations require BLM to initiate proceedings to cancel the lease.

                        Criminal penalties may also be sought against persons convicted of the
                        above violations. Criminal penalties may consist of a fine of up to
                        $50,000, or imprisonment for up to 2 years, or both.

                        If necessary, at any time during the enforcement proceedings, BLM may
                        also shut down lease operations if they have commenced without BLM
                        approval, or if a violation is major. Operators may contest any enforce-
                        ment action and request an administrative review before a BLM State
                        Director, who has the power to reduce assessments. In addition, the Sec-
                        retary of the Interior has the power to reduce penalties.


Certification Program   In December 1986 BLM instituted a certification program for inspec-
                        tors-“The     National Certification Program for Oil and Gas Inspection
                        and Enforcement Personnel.” This program requires that all inspectors
                        be certified before they are authorized to issue citations for violations.
                        The certification program requires new employees to (1) successfully
                        complete two formal training courses on drilling and production, (2)
                        undergo a comprehensive on-the-job training program covering 67 indi-
                        vidual elements, and (3) demonstrate proficiency in 61 field inspection
                        tasks (the technical review). Inspectors who were employed prior to
                        December 1986 were also expected to demonstrate their knowledge and
                        skills in the technical review before being certified under this program.


Reporting               Until August 1988, BLM headquarters required state offices to prepare
                        and submit quarterly reports summarizing inspection activity. The
                        reports were initiated by the field offices and then summarized by each
                        state office. Currently, BLM'S strategy states that BLM can track the
                        number and types of inspections performed by querying the Automated
                        Inspection Records System (AIRS), the inspection and enforcement pro-
                        gram’s computerized official data base.


                        Page18                                    GAO/RCED9099ProductionVerification
                                             chapter    1
                                             Introduction




                                             For example, a problem with the valves on an oil storage tank could be
                                             identified in a checklist inspection and could result in a detailed produc-
                                             tion verification inspection. Such valves must be sealed using uniquely
                                             numbered metal strips that must be cut to open the valves, thereby
                                             allowing detection of unauthorized removal of oil. Figure 1.3 shows a
                                             correctly sealed valve leading from an oil storage tank on a federal
                                             lease. An inspector who sees a valve that is incorrectly sealed or not
                                             sealed when conducting a basic checklist inspection could determine
                                             that this problem warrants a subsequent follow-up or production verifi-
                                             cation inspection.

Figure 1.3: Correctly Sealed Oil Valve




                                             Production verification inspections are much more time-consuming
                                             because they require observations and measurements over a period of
                                             time, generally 1 month. During this period, the inspector should

                                         . verify inventories when opening and closing measurements are made,
                                           either by observation or by independent measurement;
                                         . ensure that the operator and purchaser use proper measurement equip-
                                           ment and techniques;
                                         . witness every transfer of production;
                                         l calculate production for the period and compare it with volumes
                                           reported by the operator for the period and for a past comparable
                                           period; and




                                              Page 16                                   GAO/RCED-9099   Production Verification
                                   Chapter 1
                                   Introduction




Figure 1.2: Oil Pumping Unit




Assigning Inspection               Although FDGRMA requires at least annual inspections of leases that pro-
Priorities                         duce significant quantities of oil or gas, as well as leases that have histo-
                                   ries of noncompliance with law and regulations, the act did not define
                                   significant production or history of noncompliance. Therefore, BLM
                                   established the following criteria for such leases:

                               l monthly oil production averaging at least 3,000 barrels or monthly gas
                                 production averaging at least 30 million cubic feet (Mmcf); or
                               . at least one major violation or at least five total violations related to
                                 production or site security during the previous 24 months. (Major viola-
                                 tions are those causing or threatening immediate, substantial, and
                                 adverse impacts on public health and safety, the environment, produc-
                                 tion accountability, or royalty income.)

                                   BLM designates leases that meet either of these standards as high pri-
                                   ority for inspection?

                                    Field offices develop a second priority list of leases that (1) are located
                                    in or next to an area of special environmental sensitivity-a     designated
                                    wilderness area, for example-or in an area where operations could
                                    constitute a serious risk to the environment; (2) are located in an area

                                    “BLM’s inspectionand enforcementprogramusesthe term “inspection item,” which includesin&-
                                    vidual leases,as well as communihzationagreementsand units by participating area,which may
                                    have morethan one lease.Throughout this report, the term “lease” refers to all of these.



                                    Page 14                                             GAO/RCED90-99     Production   Verification
BLM'S basic management philosophy provides for decentralized control,
with as much authority and responsibility as possible delegated to lower
operating levels. Responsibility for BLM'S inspection and enforcement
program is also decentralized, with oversight exercised through its state
offices. BLM reported in June 1988 that it employed about 117 inspectors
nationwide at its district and resource area offices (referred to in this
report as “field offices”) and that fiscal year 1987 program expendi-
tures totaled $7.1 million.

BLM'S program policy is presented through “strategies”    issued by BLM'S
Director to the state offices, and in turn distributed by state offices to
their field offices. Under BLM'S decentralized organization, the strategies
are considered guidelines rather than requirements. State and field
offices are expected to comply with the strategies; however, offices may
vary in their interpretation.

The current strategy, effective for fiscal year 1988 and subsequent
years, was issued in draft in May 1987 and was made final in August
1988. This strategy was developed by a team of state and field office
representatives, with BLM headquarters having an advisory and review
role. It states that BLM'S highest priority inspections are those relating to
production, and that its primary inspection goal is to meet the FOGRMA
mandate to inspect, at least annually, all leases with significant produc-
tion or with histories of noncompliance.

BLM's inspection and enforcement program includes inspections of pro-
ducing oil and gas wells, as well as inspections of well drilling and aban-
donment operations. Production inspections-which        focus on
production accountability, but may also address environmental and
safety issues-represented    about 85 percent of the total inspections
completed in the inspection and enforcement program. The remaining 15
percent of inspections focused on drilling and abandonment of
operations.

When inspecting producing leases, BLM inspectors generally inspect all
the facilities, such as the pump that brings the oil and gas out of the
ground; the heater-treater that separates the oil, gas, and residual
water; and the tanks used to store production until it is sold. Inspectors
also inspect the pipes, valves, and gauges that transport the oil and gas
and connect these facilities. Figure 1.1 illustrates a complete oil produc-
tion facility, and figure 1.2 shows a typical oil pump on a producing
federal lease.



Page12                                      GAO/RCED9099ProductionVerificaton
Introduction


                   Federal and Indian onshore oil and gas leases yielded royalties of $471
                   million in 1988, the latest year for which such data are available. Royal-
                   ties are usually 12-l/2 percent of the value of oil and gas produced. Of
                   the $471 million, the federal government received $413 million from its
                   leases, and Indians received $58 million from their leases. The federal
                   government distributed about half of its royalties to states.’

                   The Department of the Interior’s Bureau of Land Management (BLM) is
                   responsible for inspecting federal and Indian onshore oil and gas
                   leases-about 20,000 in production nationwide-and       enforcing provi-
                   sions of federal laws and regulations. Inspection and enforcement are
                   intended to prevent theft or waste of oil and gas and to guarantee
                   proper production and measurement of these resources for determining
                   royalty payments. Interior’s Minerals Management Service (MMS) is
                   responsible for accounting for and collecting these revenues.

                   Concern about inspection and enforcement were raised in the late 1970s
                   and the 1980s with reports issued by GAO, Interior’s Office of the
                   Inspector General, and the Commission on Fiscal Accountability of the
                   Nation’s Energy Resources (the Linowes Commission),2 and with testi-
                   mony at several public hearings. The following inspection and enforce-
                   ment problems were among those identified:

               l The federal government relied almost entirely on production and sales
                 data reported by oil and gas companies, making little effort to verify the
                 accuracy of the information and allowing industry to operate essentially
                 on an honor system.
               . The quality of lease inspections conducted by the federal government
                 was questionable, allowing thefts and violations on federal leases to go
                 undetected.
               l The federal government employed too few field inspectors, many of
                 whom were inexperienced and untrained.
               l Federal inspectors did not regularly communicate with accounting per-
                 sonnel about discrepancies found during inspections.




                   ‘By law, all statesexceptAlaska receive50 percentof the royalties generatedfrom federal leases
                   within their boundaries,and Alaska receives90 percent.
                   “Fiscal Accountability of the Nation’sEnergyResources,Reportof the Commission,chaired by David
                   F. Linowes,Jan. 1982.



                   Page 10                                               GAO/RCED-90.99Production Verification
          Table I. 1: Federal and Indian Onshore Oil and Gas                         59
              Production and Royalties, Calendar Year 1988
          Table 1.2: Federal and Indian Onshore Oil and Gas Leases                   59
              and Wells, as of July 1988
          Table 1.3: Field Offices Reviewed                                          60
          Table 1.4: Leases Reviewed at Six BLM Field Offices                        61
          Table 111.1:Citations Issued at Six BLM Field Offices in                   65
               Fiscal Years 1986,1987, and 1988
          Table 111.2:General Nature of Violations Cited                             65
          Table 111.3:Total Specific Violations Cited in AIRS for the                66
               Six Field Offices

Figures   Figure   1.1: Oil Production Facility                                      13
          Figure   1.2: Oil Pumping Unit                                             14
          Figure   1.3: Correctly Sealed Oil Valve                                   16
          Figure   1.4: Inspector Gauging Oil Storage Tank                           17




          Abbreviations

          AIRS       Automated Inspection Record System
          BLM        Bureau of Land Management
          GAO        General Accounting Office
          FWRMA      Federal Oil and Gas Royalty Management Act of 1982
          MMS        Minerals Management Service
          Mcf        thousand cubic feet
          Mmcf       million cubic feet


          page 8                                    GAO/RCEDSO.99Production Verification
contents


Executive Summary                                                                                     2

Chapter 1                                                                                           10
Introduction            Federal Laws Require Inspection and Enforcement                             11
                        BLM’s Inspection and Enforcement Program                                    11
                        MMS Royalty Accounting Responsibilities                                     19
                        Objectives, Scope, and Methodology                                          19

Chapter 2                                                                                           22
Limited Production      Allegations of Theft and Production Underreporting                          22
                             Continue
Verification Does Not   Few Inspections Verify Production                                           23
Ensure Accurate         BLM Has Not Validated Its Inspection Strategy                               23
Computation of          Conclusions                                                                 25
                        Recommendations                                                             25
Royalties
Chapter 3                                                                                           27
Inspection Program      Program Responsibility Is Decentralized                                     27
                        Program Is Implemented Inconsistently                                       29
Oversight Is            Program Evaluation Is Inadequate                                            35
Inadequate              Conclusions                                                                 38
                        Recommendations                                                             38

Chapter 4                                                                                           40
Automated Official      Inspection Data Are Unreliable                                              40
                        Enforcement Data Are Incomplete                                             45
Program Data Are        Inadequate AIRS Guidance and Controls                                       47
Unreliable              Conclusions                                                                 48
                        Recommendations                                                             49

Chapter 5                                                                                           50
More Cooperation        Cooperation Between BLM and MMS                                             50
                        Neither Agency Is Clearly Better Able to Fulfill Inspection                 52
Between BLM and              and Enforcement Program Responsibilities
MMS Needed              Conclusions                                                                 53
                        Recommendations                                                             54




                        Page 6                                    GAO/RCED-90-99Production Verification
                       ExecutiveSummary




                       of enforcement actions taken, the amount of training given inspectors,
                       and the extent of program evaluation. For example, a lease operator was
                       shut down by one BLM field office for noncompliance but allowed to con-
                       tinue lease operations elsewhere by another field office in spite of the
                       same identified deficiencies. As a result of the wide variance among
                       field offices in program implementation, BLM does not know the extent
                       of compliance with its inspection program strategies.


Automated Inspection   Inadequate guidance and monitoring have also resulted in BLM'S com-
Data Are Unreliable    puter-based information system being unreliable. For example, some
                       leases’ inspection priorities did not correspond to production and com-
                       pliance data, some inspections were entered into the system that were
                       not performed, and some inspection results were inaccurately recorded.
                       In addition, the Automated Inspection Record System does not contain
                       information on enforcement actions involving federal or Indian leases
                       that occur outside BLM, such as court judgments. As a result of these
                       deficiencies, the system is of limited use in managing the program.


                       Because BLM's reliance on checklist inspections does not ensure accurate
Recommendations        reporting of production, GAO recommends that the Secretary of the Inte-
                       rior require the Director of BLM to determine whether, using available
                       resources, alternative inspection strategies would better identify signifi-
                       cant underreporting of production, Interior should look at alternatives
                       such as conducting production verification inspections on randomly
                       selected leases. If Interior determines that such probability sampling
                       would be more effective than inspecting all high-priority leases annu-
                       ally, Interior should ask the Congress to amend EQGRMAaccordingly. (See
                       ch. 2.)

                       In addition, GAO recommends that the Secretary direct the Director of
                       BLMto require stronger program oversight (see ch. 3) and to improve the
                       program’s official automated data (see ch. 4).


                       The Department of the Interior provided written comments on a draft of
Agency Comments        this report. Interior agreed, in general, with all of our recommendations.
                       Interior also said that BLM is taking actions to remedy deficiencies identi-
                       fied in our report. Interior’s comments are presented and evaluated in
                       appendix VII, and comments regarding actions that Interior has taken or
                       planned are summarized in chapter 6.



                       Page4                                      GAO/RCELM%99Production Verification
Executive Summary


                   In 1988, the federal government, states, and Indians shared almost half
Purpose            a billion dollars in revenues from a percentage (called royalties) of the
                   value of the oil and gas produced from about 20,000 leases located on
                   onshore federal and Indian lands. Concerned, however, about persistent
                   allegations of continued underpayment of such royalties, the Chairman,
                   Subcommittee on Mineral Resources Development and Production,
                   Senate Committee on Energy and Natural Resources, asked GAO to eval-
                   uate the Department of the Interior’s inspection and enforcement pro-
                   gram responsibility for onshore federal and Indian oil and gas lease
                   production verification. The Secretary of the Interior has assigned that
                   responsibility to the Bureau of Land Management (BLM). Our review
                   addressed adequacy of inspections, program oversight, and accuracy of
                   program data.


                   Responding to problems identified by GAO, Interior’s Office of the
Background         Inspector General, and the Commission on Fiscal Accountability of the
                   Nation’s Energy Resources (the Linowes Commission), the Congress
                   passed the Federal Oil and Gas Royalty Management Act of 1982
                   (FOGRMA). This act requires Interior to establish a comprehensive system,
                   including inspections, for accurately determining oil and gas royalties. A
                   key component of such a system is the verification of production. The
                   act also requires at least annual inspections of leases producing signifi-
                   cant quantities of oil or gas and leases having histories of noncompli-
                   ance with applicable laws and regulations.

                   BLM generally performs two types of inspections relating to production.
                   The basic 40-point checklist inspection is a brief observation of a lease
                   to identify production-related problems, such as improperly sealed
                   valves. It is not designed to verify inventories or production or to com-
                   pare calculated production with volumes reported by the operator for
                   the period or for a past comparable period. The production verification
                   inspection is meant to determine if underreporting of production has
                   occurred. It is more comprehensive and includes several visits to a lease
                   site within a month to verify inventories, observe and estimate produc-
                   tion, and compare calculated production with volumes reported.


                   The extent of BLM's production verification is inadequate to satisfy
Results in Brief   FYIGRMA'Srequirement that Interior accurately determine royalties. In
                   1982, the Linowes Commission concluded that the federal government
                   had allowed the oil and gas industry to operate essentially on an honor
                   system whereby royalties were based on mostly unverified data


                   Page 2                                    GAO/RCED-99-99   Production   Verification